Journal of Economics and Finance

, Volume 18, Issue 1, pp 89–100 | Cite as

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

  • D. Michael Long
  • Michael D. Schinski
  • Dennis T. Officer

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.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ajinkya, Bipin B., andPrem C. Jain. «The Behavior of Daily Stock Market Trading Volume.”Journal of Accounting and Economics 11 (November 1989): 331–359.CrossRefGoogle Scholar
  2. Arditti, Fred D., andKose John. “Spanning the State Space with Options.”Journal of Financial and Quantitative Analysis 15 (March 1980): 1–9.CrossRefGoogle Scholar
  3. 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.CrossRefGoogle Scholar
  4. 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.Google Scholar
  5. Conrad, Jennifer. “The Price Effect of Option Introduction.”Journal of Finance 44 (June 1989): 487–498.CrossRefGoogle Scholar
  6. Detemple, Jerome, andPhilippe Jorion. “Option Listing and Stock Returns: An Empirical Analysis.”Journal of Banking and Finance 14 (October 1990): 781–801.CrossRefGoogle Scholar
  7. Dimson, Elroy. “Risk Measurement When Shares are Subject to Infrequent Trading.”Journal of Financial Economics 7 (June 1979): 197–226.CrossRefGoogle Scholar
  8. Edelman, Richard B., and H. Kent Baker. “Liquidity and Stock Exchange Listing.”Financial Review (May 1990): 231–249.Google Scholar
  9. Fedenia, Mark, andTheoharry Grammatikos. “Options Trading and the Bid-Ask Spread of the Underlying Stocks.”Journal of Business 65(3) (July 1992): 335–369.CrossRefGoogle Scholar
  10. 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
  11. 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.CrossRefGoogle Scholar
  12. Jennings, Robert, andLaura Starks. “Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets.”Journal of Finance 41 (March 1986): 107–125.CrossRefGoogle Scholar
  13. Kim, Wi Saeng, and Colin M. Young. “The Effect of Traded Option Introduction on Shareholder Wealth.”Journal of Financial Research (Summer 1991): 141–153.Google Scholar
  14. Officer, Dennis T., and Gary L. Trennepohl. “Prince Behavior of Corporate Equities Near Option Expiration Dates.”Financial Management (Summer 1981): 75–80.Google Scholar
  15. 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
  16. Ross, Stephen A. “Options and Efficiency.”Quarterly Journal of Economics 90 (February 1976): 75–89.CrossRefGoogle Scholar
  17. 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
  18. Skinner, Douglas J. “Options Markets and Stock Return Volatility.”Journal of Financial Economics 23 (June 1989): 61–78.CrossRefGoogle Scholar
  19. 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.Google Scholar

Copyright information

© Springer 1994

Authors and Affiliations

  • D. Michael Long
    • 1
  • Michael D. Schinski
    • 2
  • Dennis T. Officer
    • 3
  1. 1.University of Southwestern LouisianaLafayette
  2. 2.Geneseo UniversityGeneseo
  3. 3.University of KentuckyLexington

Personalised recommendations