Options listings and individual equity volatility

Abstract

This article examines the effect of options introduction on the conditional volatility of 1,576 individual firms over the 1973-1996 time period. With the use of a GJR-GARCH specification for daily volatility, it is found, for the majority of firms, that option listing does not impact the underlying equity security. Listing effects are identified for a small subset of firms, specifically smaller firms with high trading volume and/or volatility. For these firms there is evidence of a change in the conditional volatility process after option listing, and it is concluded that options continue to provide additional information about the underlying equity for these companies.