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Another Look at Option Listing Effects

Stewart Mayhew and Vassil Mihov ()

Finance from University Library of Munich, Germany

Abstract: Previous research has documented that the introduction of options seems to affect the volatility, liquidity, price and other characteristics of the underlying stock. Existing research, however, has not adequately accounted for the fact that option listing is endogenous, a result of decisions made by exchanges and regulators. We investigate the factors affecting the exchanges’ listing decisions by comparing the characteristics of stocks selected for option listing to other stocks that were eligible but not listed. We find that firm size, volume, and volatility are positively related to the probability of listing, but their relative contributions have changed significantly over time. We re-examine the option listing effects by using control samples of stocks that were eligible, and appeared to be good candidates for listing, but were not selected. Contrary to previous research, we find that in recent subperiods, volatility increases with option listing, consistent with the hypothesis that forward-looking exchanges list options in anticipation of increasing volatility. We verify previous findings that underlying volume increases with option listing, and that there was a positive price effect associated with option listing prior to 1981. However, evidence of a negative price effect after 1981 appears to be much weaker than previously reported. Finally, we document a cross- sectional relationship between the price effect, the volume effect and the volatility effect.

Keywords: option listing; derivatives; regulation; SEC (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2000-04-25
Note: Type of Document - MS Word 2000/Adobe Acrobat 3.01; prepared on Windows 98; to print on HP LaserJet; pages: 42 ; figures: included. Comments are welcome. Also available at the authors' pages:
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