Trading Puts and CDS on Stocks with Short Sale Ban

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Abstract
We examine the interaction between price discovery in banned stocks and the trad- ing and prices of options and CDS during the 2008 short sale ban. We nd that in banned stocks with options, (1) stocks with high put-call ratios underperform in the following ve days, (2) ratios of synthetic to real stock prices have higher stock return predictability, and (3) stocks with high CDS percentage change have low subsequent returns. Our results suggest that informed investors trade derivatives in severely dete- riorated market conditions, and that derivative prices are more informationally efficient than stock prices during the ban.