FIN-02-034 |
NYU Stern School of Business |
October 2002
Eli Ofek, Matthew Richardson and Robert F. Whitelaw
ABSTRACT
In this paper, we investigate empirically the well-known put-call parity no-arbitrage
relation in the presence of short sale restrictions. We use a new and comprehensive
sample of options on individual stocks in combination with a measure of the cost and
difficulty of short selling, specifically the spread between the rate a short-seller earns on
the proceeds from the sale relative to the normal rate (the rebate rate spread). We find
statistically and economically significant violations of put-call parity that are strongly
related to the rebate rate spread. Stocks with negative rebate rate spreads exhibit prices in
the stock market that are up to 7.5% greater than those implied in the options market (for
the extreme 1% tail). Even after accounting for transaction costs in the options markets,
these violations persist and their magnitude appears to be related to the general level of
valuations in the stock market. Moreover, the extent of violations of put-call parity and
the rebate rate spread for individual stocks are significant predictors of future stock
returns. For example, cumulative abnormal returns, net of borrowing costs, over a 2½-year
sample period can exceed 70%. It is difficult to reconcile these results with rational
models of investor behavior, and, in fact, they are consistent with the presence of over-optimistic
irrational investors in the markets for some individual securities.
Eli Ofek
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0356
Fax: (212) 995-4233
Email: eofek@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~eofek
Matthew Richardson
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Fax: (212) 995-4233
Email: mrichard@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~mrichard
Robert Whitelaw
Institution: Stern School of Business, New York University
Telephone: (212) 998-0338
Fax: (212) 995-4233
Email: rwhitela@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~rwhitela/
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