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The Effect of Option Listing on Bid-Ask Spreads, Price Volatility, and Trading Activity of the Underlying OTC Stocks

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  • Wei, Peihwang
  • Poon, Percy S
  • Zee, Susan

Abstract

This paper examines the changes in spreads, price volatility, and trading activity surrounding option listing for a sample of 144 OTC stocks. For this sample, both price volatility and volume increase, but the evidence on spreads is mixed. The increase in price volatility is attributed primarily to an increase in residual return variances. Furthermore, price volatility increases even after controlling for volume, insider trading, and spreads. Although these variables do not fully explain the causes for the increase in price volatility after option listing, the results suggest that liquidity trading or volume has a stronger effect on price volatility than inside trading. This study also finds that both the number of trades and institutional holdings show substantial increases, which are supportive of the notion that listing of options on OTC stocks attracts more attention. Copyright 1997 by Kluwer Academic Publishers

Suggested Citation

  • 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.
    • Handle: RePEc:kap:rqfnac:v:9:y:1997:i:2:p:165-80
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    Cited by:

    1. Eunpyo Hong & Min C. Park & Tao‐Hsien Dolly King, 2023. "The effect of option listing on financing decisions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 858-891, March.
    2. Guenther-Luebbers, Welf & Henke, Soren & Theuvsen, Ludwig, 2012. "Management of Volatility in the Grain Market," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122548, European Association of Agricultural Economists.
    3. Sabrina Ecca & Michele Marchesi & Alessio Setzu, 2008. "Modeling and Simulation of an Artificial Stock Option Market," Computational Economics, Springer;Society for Computational Economics, vol. 32(1), pages 37-53, September.
    4. Leonard L. Lundstrum, 2016. "Option listing: market quality revisited," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 565-578, October.

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