The Effect of Options on Stock Prices: 1973 to 1995

I show that the effect of option introductions on underlying stock prices is best described by a two-regime switching means model whose optimal switch date occurs in 1981. In accordance with previous studies, I find positive abnormal returns for options listed during 1973 to 1980. By contrast, I fin...

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Bibliographic Details
Published in:The Journal of finance (New York) 2000-02, Vol.55 (1), p.487-514
Main Author: Sorescu, Sorin M.
Format: Article
Language:English
Subjects:
Call options
Coefficients
Effects
Estimation methods
Financial securities
Options contracts
Options markets
Securities markets
Security portfolios
Shorter Papers
Statistical median
Stock exchanges
Stock options
Stock prices
Studies
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Summary:I show that the effect of option introductions on underlying stock prices is best described by a two-regime switching means model whose optimal switch date occurs in 1981. In accordance with previous studies, I find positive abnormal returns for options listed during 1973 to 1980. By contrast, I find negative abnormal returns for options listed in 1981 and later. Possible causes for this switch include the introduction of index options in 1982, the implementation of regulatory changes in 1981, and the possibility that options expedite the dissemination of negative information.
ISSN:0022-1082
1540-6261
DOI:10.1111/0022-1082.00214