Skip to main content
SpringerLink
Log in

The impact of option listing on the price volatility and trading volume of underlying OTC stocks

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

This paper examines the impact of an initial option listing on the price volatility and trading volume of underlying OTC stocks. The sample is divided by market value to determine whether larger firms are impacted differently by option listing than smaller firms. We find relative trading volume increases significantly, with the small and medium market value firms showing the largest gain. However, the tests show no evidence of changes in price volatility following option listing. No significant changes were found in either the firms' betas or variance following option initiation. The results provide further evidence that option listing does not destabilize the market for the underlying stock.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Ajinkya, Bipin B., andPrem C. Jain. «The Behavior of Daily Stock Market Trading Volume.”Journal of Accounting and Economics 11 (November 1989): 331–359.

    Article  Google Scholar 

  • Arditti, Fred D., andKose John. “Spanning the State Space with Options.”Journal of Financial and Quantitative Analysis 15 (March 1980): 1–9.

    Article  Google Scholar 

  • Bansal, Vipul K., Stephen W. Pruitt, andK.C. John Wei. “An Empirical Reexamination of the Impact of CBOE Option Initiation on the Volatility and Trading Volume of the Underlying Equities: 1973–1986.”Financial Review 24 (February 1989): 19–29.

    Article  Google Scholar 

  • Branch, Ben, and Joseph E. Finnerty. “The Impact of Option Listing on the Price and Volume of the Underlying Stock.”Financial Review (Spring 1981): 1–15.

  • Conrad, Jennifer. “The Price Effect of Option Introduction.”Journal of Finance 44 (June 1989): 487–498.

    Article  Google Scholar 

  • Detemple, Jerome, andPhilippe Jorion. “Option Listing and Stock Returns: An Empirical Analysis.”Journal of Banking and Finance 14 (October 1990): 781–801.

    Article  Google Scholar 

  • Dimson, Elroy. “Risk Measurement When Shares are Subject to Infrequent Trading.”Journal of Financial Economics 7 (June 1979): 197–226.

    Article  Google Scholar 

  • Edelman, Richard B., and H. Kent Baker. “Liquidity and Stock Exchange Listing.”Financial Review (May 1990): 231–249.

  • Fedenia, Mark, andTheoharry Grammatikos. “Options Trading and the Bid-Ask Spread of the Underlying Stocks.”Journal of Business 65(3) (July 1992): 335–369.

    Article  Google Scholar 

  • Grammatikos, Theoharry, andGeorge J. Papaioannou. “Market Reaction to NYSE Listings: Tests of the Marketability Gains Hypothesis.”Journal of Financial Research 9(3) (Fall 1986): 215–227.

    Google Scholar 

  • Hakansson, Nils H. “Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation.”Journal of Finance 37 (September 1982): 977–1004.

    Article  Google Scholar 

  • Jennings, Robert, andLaura Starks. “Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets.”Journal of Finance 41 (March 1986): 107–125.

    Article  Google Scholar 

  • Kim, Wi Saeng, and Colin M. Young. “The Effect of Traded Option Introduction on Shareholder Wealth.”Journal of Financial Research (Summer 1991): 141–153.

  • Officer, Dennis T., and Gary L. Trennepohl. “Prince Behavior of Corporate Equities Near Option Expiration Dates.”Financial Management (Summer 1981): 75–80.

  • Rao, Ramesh P., Niranjan Tripathy, andWilliam P. Dukes. “Dealer Bid-Ask Spreads and Options Trading on Over-the-Counter Stocks.”Journal of Financial Research 14 (Winter 1991): 317–325.

    Google Scholar 

  • Ross, Stephen A. “Options and Efficiency.”Quarterly Journal of Economics 90 (February 1976): 75–89.

    Article  Google Scholar 

  • Securities and Exchange Commission. “Report on the Special Study of the Options Market to the Securities and Exchange Commission.” Washington, DC. GPO, December 22, 1979.

    Google Scholar 

  • Skinner, Douglas J. “Options Markets and Stock Return Volatility.”Journal of Financial Economics 23 (June 1989): 61–78.

    Article  Google Scholar 

  • Whiteside, Mary M., William P. Dukes, and Patrick M. Dunne. “Short Term Impact of Option Trading on Underlying Securities.”Journal of Financial Research (Winter 1983): 313–321.

Download references

Author information

Authors and Affiliations

  1. University of Southwestern Louisiana, Lafayette, LA

    D. Michael Long

  2. Geneseo University, Geneseo, NY

    Michael D. Schinski

  3. University of Kentucky, Lexington, KY

    Dennis T. Officer

Authors
  1. D. Michael Long
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Michael D. Schinski
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Dennis T. Officer
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Long, D.M., Schinski, M.D. & Officer, D.T. The impact of option listing on the price volatility and trading volume of underlying OTC stocks. J Econ Finan 18, 89–100 (1994). https://doi.org/10.1007/BF02920225

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02920225

Keywords

Search

Navigation