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Options Trading and the Bid-Ask Spread of the Underlying Stocks

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Author Info
Fedenia, Mark
Grammatikos, Theoharry
Abstract

This study shows that options listing significantly affects the spreads on the underlying stock. The authors identify a trade-off between the benefits of increased liquidity and the cost of informational externalities. Highly liquid stocks tend to have spread increases, while illiquid stocks experience spread decreases. The effect occurs in concert with nonlisting volatility changes. The spread changes do not appear to be caused by shifts in liquidity between the stock and options market. Often, spread changes are large enough to affect significantly the cost of equity capital. Copyright 1992 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 65 (1992)
Issue (Month): 3 (July)
Pages: 335-51
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Handle: RePEc:ucp:jnlbus:v:65:y:1992:i:3:p:335-51

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  1. Kabir, R., 1997. "The price and volatility effects of stock option introductions : a reexamination," Discussion Paper 37, Tilburg University, Center for Economic Research. [Downloadable!]
  2. P. A. Tinsley, 1998. "Short rate expectations, term premiums, and central bank use of derivatives to reduce policy uncertainty," Finance and Economics Discussion Series 1999-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, EconWPA. [Downloadable!]
  4. James Clouse & Dale Henderson & Athanasios Orphanides & David Small & Peter Tinsley, 2000. "Monetary policy when the nominal short-term interest rate is zero," Finance and Economics Discussion Series 2000-51, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  5. Thomas Kraus & Heinz Zimmermann, 2002. "Stock Option Listings:Information versus Liquidity Effects," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(I), pages 83-97, March. [Downloadable!]
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