The effects of option listing on the underlying stocks' return processes

Abstract

The effects of option listing on the returns processes of the underlying securities are examined in this paper by looking at a sample of 200 firms which had options listed on them on the CBOE and the AMEX between 1973 and 1983. We find that the listing of options leads to significantly lower variance in the daily returns or the underlying stocks. We also find that prices adjust much more quickly to new information and that the noise component declines after the listing of options. We trace the speedier price adjustment process to increased information collection after the listing and the reduced noise after the listing to a decline in the bid-ask spread after option listing, partially because of increased competition from market-makers on the option market and partially because of increased institutional interest in the stocks after listing. © 1991.