Abstract
This research is an empirical study of relationship between short sales constraints in the equity market and arbitrage profit, indicate by put-call parity violation in the option market. In the paper, I regress arbitrage profit on short sale constraint proxy, which equal to 1 if the observation is in the US financial stock short-sales ban period, 19 Sept - 8 Oct 2008. I control for option's Characteristic like moneyness and maturity of option, liquidity factor and stock valuation and volatility level. The preliminary result shows that, first, put-call parity does exist in the option market in such a way that value of stock contain premium compare to synthetic portfolio, which comprise of bon, put and call option. Second, arbitrage profit is higher for arbitrage strategy that include shorting stock position because the present of short sales constraint in the equity market. Third, when transaction cost is incorporated, the arbitrage profit decline. Fourth, observations that are from the period of short sales ban would exhibit higher arbitrage profit.
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