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Stock Splits, Volatility Increases, and Implied Volatilities

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  • Sheikh, Aamir M

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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  • Sheikh, Aamir M, 1989. " Stock Splits, Volatility Increases, and Implied Volatilities," Journal of Finance, American Finance Association, vol. 44(5), pages 1361-1372, December.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1361-72
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    Cited by:

    1. 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.
    2. 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.
    3. Isakov, Dusan & Perignon, Christophe, 2001. "Evolution of market uncertainty around earnings announcements," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1769-1788, September.
    4. 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.
    5. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    6. Ben Ammar, Semir, 2016. "Pricing of Catastrophe Risk and the Implied Volatility Smile," Working Papers on Finance 1617, University of St. Gallen, School of Finance.
    7. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    8. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    9. 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.

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