OPTIONS, SHORT SALES, AND MARKET COMPLETENESS

This paper presents empirical evidence that trading in options contrib utes to both transactional and informational efficiency of the stock m arket by reducing the effect of constraints on short sales. The signif icantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. W e also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that optio ns also increase information efficiency. Earlier work, that is replica ted and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to r educe that effect.