Review of Quantitative Finance and Accounting

, Volume 17, Issue 3, pp 267–282

Option Trading and the Intervalling Effect Bias in Beta

  • Li-Chin Jennifer Ho
  • Jeffrey J. Tsay
Article

DOI: 10.1023/A:1012292626308

Cite this article as:
Ho, LC.J. & Tsay, J.J. Review of Quantitative Finance and Accounting (2001) 17: 267. doi:10.1023/A:1012292626308

Abstract

Prior studies show that the beta coefficient of a security changes systematically as the length of measurement interval is varied. This phenomenon, which is called the intervalling effect bias in beta, has been attributed to the friction in the trading system that causes the delays in the price-adjustment process. This study shows that option listing is associated with a decline in the beta intervalling effect bias. The decline is most pronounced for small firms. We also find that our sample firms grow significantly after option listing. Since prior research indicates that market value is a major determinant of the magnitude of the intervalling effect, we re-examine our results using a subsample that controls for market value. The results indicate that the decline in the beta bias from the pre-listing to post-listing period is still prevalent after we control for the change in firm size. Overall, the evidence is consistent with the notion that option trading reduces the delays in the price-adjustment process, which in turn reduces the intervalling effect bias in beta.

option trading beta estimation intervalling effect bias 

Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • Li-Chin Jennifer Ho
    • 1
  • Jeffrey J. Tsay
    • 1
  1. 1.University of Texas at ArlingtonUSA

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