Premium
The Impact of Option Introduction on Stock Return Variances: The Role of Bid‐Ask Spreads, Return Autocorrelations, and Intrinsic Variances
Author(s) -
Niendorf Bruce D.,
Peterson David R.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00418.x
Subject(s) - econometrics , ask price , economics , bid price , stock (firearms) , crash , financial economics , variance (accounting) , computer science , accounting , finance , geography , programming language , archaeology
The purpose of this paper is to examine changes in stock return variances following option introduction. The sample consists of National Market System stocks and employs both transaction returns and returns based on bid and ask quotes. Variances are decomposed into portions attributable to bid‐ask spreads, return autocorrelations, and intrinsic variances. Spreads play a negligible role in explaining variance changes. A generally positive component to short‐term autocorrelations falls following option introduction, increasing variances over short holding periods. Intrinsic variances fall prior to the October 1987 crash, but do not change after the crash with option introduction.