Role of OTC options in stock price efficiency: Evidence from the Chinese market

Yaping Zhou, Xundi Diao and Dayong Lv

Accounting and Finance, 2023, vol. 63, issue 4, 4629-4655

Abstract: We examine the effect of Chinese OTC equity options on the underlying stock information efficiency by using the standardisation of the OTC options market as an exogenous event. The results show that, due to the tight short‐sale constraints, the introduction of OTC stock options can widen the divergence of opinion about the stock price, and thus reduce the price efficiency. The significantly lower margin‐debt ratio exhibited by optioned stocks supports the argument that OTC stock options act as a substitute for margin trading. Further analysis reveals that optioned stocks are more speculative, but there is no significant change in liquidity.

Date: 2023
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