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Stock Splits, Volatility Increases, and Implied Volatilities

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  • Sheikh, Aamir M
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    Abstract

    A test of the efficiency of the Chicago Board Options Exchange, relative to postsplit increases in the volatility of common stocks, is presented. The Black-Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations around split announcement and ex-dates. Comparisons with a control group of stocks find no relative increase in the implied standard deviations of stocks announcing splits. However, a relative increase is detected at the ex-date. Therefore, the joint hypothesis that (1) the Black-Scholes and Roll formulas are true and (2) the Chicago Board Options Exchange is efficient can be rejected. Copyright 1989 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 44 (1989)
    Issue (Month): 5 (December)
    Pages: 1361-72

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    Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1361-72

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    Cited by:
    1. Isakov, Dusan & Perignon, Christophe, 2001. "Evolution of market uncertainty around earnings announcements," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1769-1788, September.
    2. Jeffrey Jones & Jenny Gu & Pu Liu, 2014. "Do dividend initiations signal a reduction in risk? Evidence from the option market," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 143-158, January.
    3. Roy Batchelor & Ismail Orakcioglu, 2003. "Event-related GARCH: the impact of stock dividends in Turkey," Applied Financial Economics, Taylor & Francis Journals, vol. 13(4), pages 295-307.
    4. Donders, Monique W. M. & Vorst, Ton C. F., 1996. "The impact of firm specific news on implied volatilities," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1447-1461, November.
    5. Peress, Joel, 2010. "The tradeoff between risk sharing and information production in financial markets," Journal of Economic Theory, Elsevier, vol. 145(1), pages 124-155, January.

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