The January effect, does options trading matter?

Cameron Truong

Australian Journal of Management, 2013, vol. 38, issue 1, 31-48

Abstract: This study examines the effect of options trading on the January effect in the period 1996–2009. The options market offers investors an alternative trading venue that circumvents several trading limitations in the equity market and hence enables a higher level of arbitrage activities. In a cross-sectional setting, we find that optioned stocks exhibit significantly lower risk-adjusted returns in January than non-optioned stocks. This effect is not attributed to firm size, illiquidity, or transaction costs. We also find that the January effect is not only smaller but also considerably more short-lived for optioned stocks than for non-optioned stocks. In a firm-specific setting, January risk-adjusted returns are found to be significantly lower in the post-options-listing period than in the pre-options-listing period. These findings support the proposition that options trading enhances information-based trading activities and hence improves the informational efficiency of the equity market. JEL classifications: G10, G11, G12, G14

Keywords: January effect; informational efficiency; options trading (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:38:y:2013:i:1:p:31-48

DOI: 10.1177/0312896212440267

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