Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short-Sale Constraints
Posted: 27 Aug 2001
Date Written: February 1, 2001
Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short-sale activities following option listing. This paper provides evidence that the documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short-sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex-ante characteristics of the underlying stock.
Keywords: Options, short-sales, effect of options on stock prices
JEL Classification: G12, G14
Suggested Citation: Suggested Citation