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Reassessing the Impact of Option Introductions on Market Quality: A Less Restrictive Test for Event-Date Effects

Published online by Cambridge University Press:  06 April 2009

Bartley R. Danielsen ,
Bonnie F. van Ness  and
Richard S. Warr
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Abstract

Prior research concludes that option introductions improve the average liquidity of the underlying stocks. We develop an improved, generalizable test to assess whether market quality changes occur on or near an event date. Applying this method to option listing events, we conclude that options do not systematically improve the market quality of the underlying security; rather, the market quality of the underlying security improves before the listing decision. Hazard model tests indicate that improving liquidity is a selection criterion in the option listing decision. Moreover, these tests suggest that the size of a stock's bid-ask spread is the single most important option listing determinant.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 1041 - 1062
Copyright
Copyright © School of Business Administration, University of Washington 2007

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