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Another Look at Option Listing Effects

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Author Info

  • Stewart Mayhew

    (University of Georgia)

  • Vassil Mihov

    (Purdue University)

Abstract

Previous research has documented that the introduction of options seems to affect the volatility, liquidity, price and other characteristics of the underlying stock. Existing research, however, has not adequately accounted for the fact that option listing is endogenous, a result of decisions made by exchanges and regulators. We investigate the factors affecting the exchanges’ listing decisions by comparing the characteristics of stocks selected for option listing to other stocks that were eligible but not listed. We find that firm size, volume, and volatility are positively related to the probability of listing, but their relative contributions have changed significantly over time. We re-examine the option listing effects by using control samples of stocks that were eligible, and appeared to be good candidates for listing, but were not selected. Contrary to previous research, we find that in recent subperiods, volatility increases with option listing, consistent with the hypothesis that forward-looking exchanges list options in anticipation of increasing volatility. We verify previous findings that underlying volume increases with option listing, and that there was a positive price effect associated with option listing prior to 1981. However, evidence of a negative price effect after 1981 appears to be much weaker than previously reported. Finally, we document a cross- sectional relationship between the price effect, the volume effect and the volatility effect.

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File URL: http://128.118.178.162/eps/fin/papers/0004/0004002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0004002.

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Length: 42 pages
Date of creation: 25 Apr 2000
Date of revision:
Handle: RePEc:wpa:wuwpfi:0004002

Note: Type of Document - MS Word 2000/Adobe Acrobat 3.01; prepared on Windows 98; to print on HP LaserJet; pages: 42 ; figures: included. Comments are welcome. Also available at the authors' pages:
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Web page: http://128.118.178.162

Related research

Keywords: option listing; derivatives; regulation; SEC;

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References

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  1. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
  2. 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.
  3. 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.
  4. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June.
  5. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
  6. 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.
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Citations

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Cited by:
  1. 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.
  2. Hiremath, Gourishankar S, 2009. "Effects of Option Introduction on Price and Volatility of Underlying Assets - A Review," MPRA Paper 46512, University Library of Munich, Germany.
  3. Mazouz, Khelifa, 2004. "The effect of CBOE option listing on the volatility of NYSE traded stocks: a time-varying variance approach," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 695-708, December.
  4. Charupat, Narat, 2006. "The effect of derivative trading on the underlying markets: Evidence from Canadian instalment receipts trading," International Review of Economics & Finance, Elsevier, vol. 15(3), pages 276-293.

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