New Evidence on Price and Volatility Effects of Stock Option Introductions

Abstract

The empirical evidence on the effect of options trading on the underlying stocks primarily comes from the United States. The existing literature is surveyed by Damodaran and Subrahmanyam (1992). They find a consistent evidence of positive excess returns with the introduction of call options and negative excess returns with the introduction of put options. They also find strong evidence of a decline of stock volatility after option listing. It is interesting to examine if markets other than the United States exhibit similar results. This paper, therefore, adds to the literature by examining data from the Dutch market. The paper is also distinct from prior studies in two more aspects: (a) both stock return and volatility effects are examined; and (b) three different samples simultaneous listings of call and put options, call options alone, and put options alone are separately investigated. In significant contrast to previous results, we find a decline in stock price associated with the introduction of options trading. The excess return in the 20-day pre-listing period (which also covers announcements of option introductions) amounts to a statistically significant -2.34%. We also observe a significantly negative price effect (-4.4%) during the post-listing period. The finding is robust to different methodologies or samples. In analyzing the effect on stock volatility, three different measures of volatility are examined over different time intervals. We could not find any significant effect of options listing on the volatility of the underlying stocks. This implies that stabilizing influences of equity options balance destabilizing effects. However, we find some support for the hypothesis that options are introduced for those stocks which, in the past, exhibited relatively higher volatility.

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Cite this paper

@inproceedings{Kabir1997NewEO, title={New Evidence on Price and Volatility Effects of Stock Option Introductions}, author={Rezaul Kabir}, year={1997} }