Figlewski is from the Stern School of Business, New York University, and Webb is from Baruch College, City University of New York. We would like to thank the Interactive Data Corporation for providing data used in this study, and Baruch College for research support. We are grateful for helpful comments on earlier versions of the paper from Robert Whaley, participants in seminars at Baruch College and Boston College, and two anonymous referees. Thanks also to Jeffrey Heisler for excellent research assistance.
Options, Short Sales, and Market Completeness
Article first published online: 30 APR 2012
1993 The American Finance Association
The Journal of Finance
Volume 48, Issue 2, pages 761–777, June 1993
How to Cite
FIGLEWSKI, S. and WEBB, G. P. (1993), Options, Short Sales, and Market Completeness. The Journal of Finance, 48: 761–777. doi: 10.1111/j.1540-6261.1993.tb04738.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.