THE INFLUENCE OF ORGANIZED OPTIONS TRADING ON STOCK PRICE BEHAVIOR FOLLOWING LARGE ONE‐DAY STOCK PRICE DECLINES

David R. Peterson

Journal of Financial Research, 1995, vol. 18, issue 1, 33-44

Abstract: In this study I examine the effect of organized options trading on stock price behavior immediately following stock price declines of 10 percent or more. A matched‐pair sample of National Market System option and nonoption firms are analyzed from June 1985 through December 1992. After controlling for the bid‐ask bounce, firm size, share price, return standard deviation, and beta, I find that three‐day cumulative abnormal returns for option firms are approximately 1.57 percent less than those for nonoption firms. Thus, options trading enhances stock market efficiency and/or liquidity. However, no profitable trading strategies are indicated.

Date: 1995
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