Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T04:15:43.221Z Has data issue: false hasContentIssue false
  • English
  • Français

Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints

Published online by Cambridge University Press:  06 April 2009

Bartley R. Danielsen  and
Sorin M. Sorescu
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 4 , December 2001 , pp. 451 - 484
Copyright
Copyright © School of Business Administration, University of Washington 2001

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Arditti, F., and John, K.. “Spanning the State Space with Options.” Journal of Financial and Quantitative Analysis, 15 (1980), 1–9.CrossRefGoogle Scholar
Asquith, P., and Meulbroek, L.. “An Empirical Investigation of Short Interest.” Working Paper, Harvard Univ. Business School (1995).Google Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–659.CrossRefGoogle Scholar
Branch, B., and Finnerty, J. E.. “The Impact of Option Listing on the Price and Volume of the Underlying Stock.” Financial Review, 16 (1981), 1–15.Google Scholar
Brent, A.; Morse, D.; and Stice, E. K.. “Short Interest: Explanations and Tests.” Journal of Financial and Quantitative Analysis, 25 (1990), 273–289.CrossRefGoogle Scholar
Brown, S. J., and Warner, J. B.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.CrossRefGoogle Scholar
Conrad, J. “The Price Effect of Option Introduction.” Journal of Finance, 44 (1989), 487–499.CrossRefGoogle Scholar
Detemple, J. “Financial Innovation, Values and Volatilities when Markets are Incomplete.” The Geneva Papers on Risk and Insurance Theory, 15 (1990), 47–53.CrossRefGoogle Scholar
Detemple, J., and Jorion, P.. “Option Listing and Stock Returns.” Journal of Banking and Finance, 14 (1990), 781–802.CrossRefGoogle Scholar
Detemple, J., and Selden, L.. “A General Equilibrium Analysis of Option and Stock Market Interactions.” International Economic Review, 32 (1991), 279–303.CrossRefGoogle Scholar
Diamond, D. W., and Verrecchia, R. E.. “Constraints on Short-Selling and Asset Price Adjustment to Private Information.” Journal of Financial Economics, 18 (1987), 277–312.CrossRefGoogle Scholar
Figlewski, S. “The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence.” Journal of Financial and Quantitative Analysis, 16 (1981), 463–476.CrossRefGoogle Scholar
Figlewski, S., and Webb, G. P.. “Options, Short Sales, and Market Completeness.” Journal of Finance, 48 (1993), 761–777.CrossRefGoogle Scholar
Greene, William H.Econometric Analysis 2nd ed.New York, NY: Macmillan Publishing Co. (1993).Google Scholar
Goetzmann, W. N., and Garry, M.. “Does Delisting from the S&P 500 Affect Stock Price?” Financial Analysts Journal, 42 (1986), 64–69.CrossRefGoogle Scholar
Hakansson, N. H. “Welfare Aspects of Options and Supershares.”Journal of Finance, 33 (1978), 759–776.CrossRefGoogle Scholar
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (1986), 815–830.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “Differences of Opinion Make a Horse Race.” Review of Financial Studies, 6 (1993), 473–506.CrossRefGoogle Scholar
Houston, J. F., and Ryngaert, M. D.. “The Overall Gains from Large Bank Mergers.” Journal of Banking and Finance, 18 (1994), 1155–1176.CrossRefGoogle Scholar
Jain, P. C. “The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500.” Financial Analysts Journal, 43 (1987), 58–65.CrossRefGoogle Scholar
Jarrow, R. “Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices.” Journal of Finance, 35 (1980), 1105–1113.CrossRefGoogle Scholar
Jones, C. M.; Kaul, G.; and Lipson, M. L.. “Transactions, Volume, and Volatility.” Review of Financial Studies, 7 (1994), 631–651.CrossRefGoogle Scholar
Karpoff, J. M. “The Relation between Price Changes and Trading Volume, a Survey.” Journal of Financial and Quantitative Analysis, 22 (1987), 109–126.CrossRefGoogle Scholar
Karpoff, J. M.. “Costly Short Sales and the Correlation of Returns with Volume.” Journal of Financial Research, 9 (1988), 173–188.CrossRefGoogle Scholar
Kumar, R.; Sarin, A.; and Shastri, K.. “The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis.” Journal of Finance, 53 (1998), 717–732.CrossRefGoogle Scholar
Lintner, J. “The Aggregation of Investors' Diverse Judgments and Preferences in Purely Competitive Security Markets.” Journal of Financial and Quantitative Analysis, 4 (1969), 347–400.CrossRefGoogle Scholar
Lynch, A. W.; and Mendenhall, R.. “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index.” Journal of Business, 70 (1997), 351–383.CrossRefGoogle Scholar
Miller, E. M. “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, 32 (1977), 1151–1168.CrossRefGoogle Scholar
Peterson, P. P., and Peterson, D. R.. “Divergence of Opinion and Return.” Journal of Financial Research, 5 (1982), 125–134.CrossRefGoogle Scholar
Pratt, J. W. “Risk Aversion in the Small and in the Large.” Econometrica, 32 (1964), 122–136.CrossRefGoogle Scholar
Ross, S. “Options and Efficiency.” Quarterly Journal of Economics, 90 (1977), 75–89.CrossRefGoogle Scholar
Shalen, C. T. “Volume, Volatility, and the Dispersion of Beliefs.” Review of Financial Studies, 6 (1993), 405–434.CrossRefGoogle Scholar
Shleifer, A. “Do Demand Curves for Stocks Slope Down?” Journal of Finance, 41 (1986), 579–590.CrossRefGoogle Scholar
Sorescu, S. “The Effect of Options on Stock Prices: 1973–1995.” Journal of Finance, 55 (2000), 487–514.CrossRefGoogle Scholar