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Another Look at Option Listing Effects


  • Stewart Mayhew

    (University of Georgia)

  • Vassil Mihov

    (Purdue University)


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.

Suggested Citation

  • Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, EconWPA.
  • 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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    References listed on IDEAS

    1. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
    2. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-498, June.
    3. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June.
    4. 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 335-351, July.
    5. 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, April.
    6. 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.
    Full references (including those not matched with items on IDEAS)


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    Cited by:

    1. Jahangir Sultan, 2012. "Options on federal funds futures and interest rate volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(4), pages 330-359, April.
    2. repec:wsi:rpbfmp:v:14:y:2011:i:02:n:s021909151100224x is not listed on IDEAS
    3. 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.
    4. Michelle A. Danis, 2003. "A Discrete Choice Approach to Measuring Competition in Equity Option Markets," Staff Working Papers 03-05, Federal Housing Finance Agency.
    5. 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.
    6. 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.
    7. repec:arp:ijefrr:2017:p:157--172 is not listed on IDEAS
    8. Michelle A. Danis, 2004. "Measurement of the Bid-Ask Spread in Equity Option Markets," Staff Working Papers 04-02, Federal Housing Finance Agency.
    9. Michael Aitken & Reuben Segara, 2005. "Impact of warrant introductions on the behaviour of underlying stocks: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(1), pages 127-144.
    10. 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.
    11. 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.

    More about this item


    option listing; derivatives; regulation; SEC;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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