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Stock Price Clustering on Option Expiration DatesSophie X. NiHong Kong University of Science and Technology Neil D. PearsonUniversity of Illinois at Urbana-Champaign - Department of Finance Allen M. PoteshmanUniversity of Illinois at Urbana-Champaign - Department of Finance August 27, 2004 AFA 2005 Philadelphia Meetings Abstract: This paper presents striking evidence that option trading changes the prices of underlying stocks. In particular, we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices. On each expiration date, the returns of optionable stocks are altered by an average of at least 16.5 basis points, which translates into aggregate market capitalization shifts on the order of $9 billion. We provide evidence that hedge re-balancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering.
Number of Pages in PDF File: 53 Keywords: Stock price clustering, Option expiration, Hedging, Manipulation JEL Classification: G12, G13, G24 working papers seriesDate posted: March 22, 2004Suggested CitationContact Information
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