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The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis

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Author Info
Raman Kumar (R. B. Pamplin College of Business, Virginia Tech,)
Atulya Sarin (Leavey School of Business, Santa Clara University,)
Kuldeep Shastri (Katz Graduate School of Business, University of Pittsburgh)

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Abstract

We find that option listings are associated with a decrease in the variance of the pricing error, a decrease in the adverse selection component of the spread, and an increase in the relative weight placed by the specialist on public information in revising prices for the underlying stocks. We also find that there is a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size after option listings. Overall, our results suggest that option listings improve the market quality of the underlying stocks. Copyright The American Finance Association 1998.

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

Volume (Year): 53 (1998)
Issue (Month): 2 (04)
Pages: 717-732
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Handle: RePEc:bla:jfinan:v:53:y:1998:i:2:p:717-732

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  1. Roberto Pascual & Alvaro Escribano & Mikel Tapia, 2004. "On the bi-dimensionality of liquidity," European Journal of Finance, Taylor and Francis Journals, vol. 10(6), pages 542-566, December. [Downloadable!] (restricted)
  2. Quentin C. Chu & Mustafa Mesut Kayali, 2006. "Standard & Poor’S Depositary Receipts And The Market Quality Of S&P 500 Index Futures," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3). [Downloadable!] (restricted)
  3. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. de Jong, Cyriel & Koedijk, Kees & Schnitzlein, Charles, 2002. "Stock Market Quality in the Prescence of a Traded Option," CEPR Discussion Papers 3173, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Jong, C.M. de, 2001. "Informed Option Trading Strategies," Research Paper ERS-2001-55-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  6. Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, EconWPA. [Downloadable!]
  7. Kabir, R., 1997. "The price and volatility effects of stock option introductions : a reexamination," Discussion Paper 37, Tilburg University, Center for Economic Research. [Downloadable!]
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