The Impact of Option Introduction on Real Estate Investment Trusts

Abstract

This paper examines the impact of option introduction on the returns, volatility, and volume of shares traded of the Real Estate Investment Trusts (REITs) that underlie the new derivative securities. The paper looks at both the initial and then longer term impact on each of these variables and then compares the impact to what previous research finds when options are introduced on non-REIT equities. We find evidence of an initial decline in price when option introduction is announced and also find significant negative returns over a longer post-announcement period. There is not a significant change in volatility at option introduction but we do find a significant increase in trading volume. We find that in most of the areas examined, REITs have a similar reaction to option introduction as do non-REIT equities.

Keywords: REIT, Options, Returns, Volatility

JEL Classification: G11, G14