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Option listing: market quality revisited

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  • Leonard L. Lundstrum

    (Northern Illinois University)

Abstract

We test for changes in liquidity around LEAPS option introduction and find two results that address important disputes in the literature. First, we find that the impact of LEAPS upon share liquidity does not occur until 23 days after the LEAPS are introduced. Our findings are in conflict with Danielsen et al.’s (J Financ Quant Anal 42:1041–1062, 2007) findings that liquidity improves before option introduction, and are consistent with the findings of Kumar et al. (J Finance 53:717–732, 1998). Second, we find that share volume increases before option introduction and so the volume increase can be predictive of option listing, but the shift in volume does not occur early enough to drive the exchange’s introduction decision.

Suggested Citation

  • Leonard L. Lundstrum, 2016. "Option listing: market quality revisited," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 565-578, October.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:3:d:10.1007_s11156-015-0512-6
    DOI: 10.1007/s11156-015-0512-6
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    References listed on IDEAS

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    1. Wei, Peihwang & Poon, Percy S & Zee, Susan, 1997. "The Effect of Option Listing on Bid-Ask Spreads, Price Volatility, and Trading Activity of the Underlying OTC Stocks," Review of Quantitative Finance and Accounting, Springer, vol. 9(2), pages 165-180, September.
    2. Lundstrum, Leonard L. & Walker, Mark D., 2006. "LEAPS introductions and the value of the underlying stocks," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 494-510, October.
    3. Leland, Hayne E, 1985. "Option Pricing and Replication with Transactions Costs," Journal of Finance, American Finance Association, vol. 40(5), pages 1283-1301, December.
    4. Jennings, Robert & Starks, Laura, 1986. "Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-125, March.
    5. Michael Clarke & Gerard Gannon & Russell Vinning, 2011. "The Impact of Warrant Introduction: The Australian Experience," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 213-269.
    6. Danielsen, Bartley R. & van Ness, Bonnie F. & Warr, Richard S., 2007. "Reassessing the Impact of Option Introductions on Market Quality: A Less Restrictive Test for Event-Date Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(4), pages 1041-1062, December.
    7. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 2000. "Pricing and hedging long-term options," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 277-318.
    8. Wi Saeng Kim & Colin M. Young, 1991. "The Effect Of Traded Option Introduction On Shareholder Wealth," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(2), pages 141-151, June.
    9. Kim, Wi Saeng & Young, Colin M, 1991. "The Effect of Traded Option Introduction on Shareholder Wealth," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(2), pages 141-153, Summer.
    10. Holden, Craig W. & Lundstrum, Leonard L., 2009. "Costly trade, managerial myopia, and long-term investment," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 126-135, January.
    11. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    12. Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(4), pages 451-484, December.
    13. repec:bla:jfinan:v:53:y:1998:i:2:p:717-732 is not listed on IDEAS
    14. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    15. repec:bla:jfinan:v:59:y:2004:i:1:p:447-471 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market quality; Liquidity; Option; LEAPS; Share volume; Derivative;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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