The Naked Truth from the Single Stock Futures Market

Abstract

In this paper, we use a novel high-frequency data set, provided by the OneChicago single stock futures exchange, to study the impact of short sale restrictions on asset prices. Contrary to Battalio and Scultz (2006), we find many violations to the put call parity relation and to the cost of carry model even when using perfectly synchronous futures and stock prices. Most of these violations occur in a direction consistent with stocks being short-sale constrained. Examining the future put call parity relation that involves no equity, we find that futures and options are fairly priced, relative to each other. Constructing an implied intra-day measure of stock's short-sale rebate rate from stock and futures prices, we show that, contrary to many critics' claims, the SEC's ban of naked short selling on 19 financial stocks in July 2008 was highly effective in raising the overall cost of shorting. After remaining at the zero level for a week, on the first day the ban was effective, the average implied short sale rebate rate on the 19 financial firms instantly dropped to -4% p.a. and eventually -8% p.a. within a couple of days.