42 Pages Posted: 1 May 2000
Date Written: January 11, 2000
We re-examine the effects of option introduction on volatility, volume, and price of the underlying stock, correcting for fact that option listing is endogenous. First, we investigate the factors affecting the listing decision and find that firm size, volume, and volatility are positively related to the probability of listing, but their relative contributions have changed significantly over time. Based on the results of this analysis, we then use a control-sample methodology to re-examine the effects of option listing. Contrary to previous research, we find that in recent periods, 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.
JEL Classification: G14, G18, G19
Suggested Citation: Suggested Citation