Option valuation models are based on an arbitrage strategy--hedging the option against the underlying asset and rebalancing continuously until expiration--that is only possible in a frictionless market. This paper simulates the impact of market imperfections and other problems with the...

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports...