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THE INFLUENCE OF ORGANIZED OPTIONS TRADING ON STOCK PRICE BEHAVIOR FOLLOWING LARGE ONE‐DAY STOCK PRICE DECLINES
Author(s) -
Peterson David R.
Publication year - 1995
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1995.tb00209.x
Subject(s) - market liquidity , volume weighted average price , market maker , stock (firearms) , economics , non qualified stock option , stock price , financial economics , monetary economics , stock market , restricted stock , cost price , business , mid price , price level , horse , series (stratigraphy) , biology , engineering , mechanical engineering , paleontology
Abstract In this study I examine the effect of organized options trading on stock price behavior immediately following stock price declines of 10 percent or more. A matched‐pair sample of National Market System option and nonoption firms are analyzed from June 1985 through December 1992. After controlling for the bid‐ask bounce, firm size, share price, return standard deviation, and beta, I find that three‐day cumulative abnormal returns for option firms are approximately 1.57 percent less than those for nonoption firms. Thus, options trading enhances stock market efficiency and/or liquidity. However, no profitable trading strategies are indicated.