Stock Splits, Volatility Increases, and Implied Volatilities
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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Volume (Year): 44 (1989)
Issue (Month): 5 (December)
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