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Listing of put options: Is there any volatility effect?
Author(s) -
Chaudhury Mohammed,
Elfakhami Said
Publication year - 1997
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/s1058-3300(97)90014-8
Subject(s) - market liquidity , volatility (finance) , economics , cross listing , listing (finance) , stock (firearms) , financial economics , variance (accounting) , econometrics , variance swap , variance risk premium , implied volatility , monetary economics , volatility swap , accounting , volatility risk premium , finance , mechanical engineering , corporate governance , engineering
This paper examines the effects of Canadian put option listings on the volatility of the underlying stocks. It also tests whether the “liquidity hypothesis” can explain the cross‐sectional effect, if any, of option listing. According to this hypothesis, option listing enhances the liquidity of the market for the underlying stock, and should lead to a lower variance for the optioned stock. Our results show that Canadian put options are not redundant when it comes to influencing the volatility of the underlying stocks. The evidence shows a decrease in the beta risk following the listing of put option. The evidence also shows a decrease in the variance following earlier put option listings. Cross‐sectionally, we find indirect support for increased liquidity leading to a variance‐ stabilization effect.