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<p>The JGTRRA enlarges the difference between tax rates of income and dividends. This difference raises the short sale cost before dividend distributions. Higher short sale costs drive short sellers to substitute option trading for short selling. This substitution raises the option liquidity due to the elastic supply of option contracts. During the substitution, short sellers prefer in-the-money options and call options. The impact on option liquidity is stronger for stocks with less overpricing and low dispersion among investors. Our study sheds light on the short sellers’ choices between the stock and option markets under different circumstances.</p>

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The effect of short sale constraint on option liquidity: evidence from JGTRRA

  • 期刊论文

  • 发表日期：

    2026年1月28日

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  • Ruixin Yang,
  • Zhaodong Zhong

摘要

The JGTRRA enlarges the difference between tax rates of income and dividends. This difference raises the short sale cost before dividend distributions. Higher short sale costs drive short sellers to substitute option trading for short selling. This substitution raises the option liquidity due to the elastic supply of option contracts. During the substitution, short sellers prefer in-the-money options and call options. The impact on option liquidity is stronger for stocks with less overpricing and low dispersion among investors. Our study sheds light on the short sellers’ choices between the stock and option markets under different circumstances.