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New Evidence on Price and Volatility Effects of Stock Option Introductions

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  • Kabir, M.R.

    (Tilburg University, Center for Economic Research)

Abstract

This paper adds to the literature dealing with the effect of derivatives trading on underlying securities by examining option listings from the Netherlands. The effects on both stock returns and volatility are investigated using three types of samples, namely, listing of call options alone, simultaneous listings of both call and put options, and listings of put options alone. A significant decline in stock price is observed with the introduction of option trading. But, no significant effect takes place on the volatility of underlying stocks. Although the evidence is in sharp contrast to the so-called “established view”, it is consistent with recent studies.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-37.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199737

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Web page: http://center.uvt.nl

Related research

Keywords: Option listing; derivatives; stock price; stock volatility;

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References

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  1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  2. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  3. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
  4. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
  5. Fedenia, Mark & Grammatikos, Theoharry, 1992. "Options Trading and the Bid-Ask Spread of the Underlying Stocks," The Journal of Business, University of Chicago Press, vol. 65(3), pages 335-51, July.
  6. Raman Kumar & Atulya Sarin & Kuldeep Shastri, 1998. "The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(2), pages 717-732, 04.
  7. Elfakhani, Said & Chaudhury, Mohammed, 1995. "The volatility effect of option listing: Some Canadian evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(1), pages 97-116.
  8. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June.
  9. Stucki, Thomas & Wasserfallen, Walter, 1994. "Stock and option markets: the Swiss evidence," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 881-893, October.
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Cited by:
  1. Sabrina Ecca & Michele Marchesi & Alessio Setzu, 2008. "Modeling and Simulation of an Artificial Stock Option Market," Computational Economics, Society for Computational Economics, vol. 32(1), pages 37-53, September.

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