The Effect of Option Listing on Bid-Ask Spreads,Price Volatility,and Trading Activity of the Underlying OTC Stocks |
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Authors: | Wei PEIHWANG Poon PERCY Zee SUSAN |
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Affiliation: | (1) Department of Economics and Finance, University of New Orleans, New Orleans, LA, 70148;(2) Department of Finance, University of Nevada, Las Vegas, Las Vegas, NV, 89154-6008;(3) Department of Business Administration, Southern University at New Orleans, New Orleans, LA, 70126 |
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Abstract: | This paper examines the changes in spreads, price volatility, and trading activity surrounding option listing for a sample of 144 OTC stocks. For this sample, both price volatility and volume increase, but the evidence on spreads is mixed. The increase in price volatility is attributed primarily to an increase in residual return variances. Furthermore, price volatility increases even after controlling for volume, insider trading, and spreads. Although these variables do not fully explain the causes for the increase in price volatility after option listing, the results suggest that liquidity trading or volume has a stronger effect on price volatility than insider trading. This study also finds that both the number of trades and institutional holdings show substantial increases, which are supportive of the notion that listing of options on OTC stocks attracts more attention. |
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Keywords: | Option listing OTC stocks trading activity |
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