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In this study the impact of option listings on bid‐ask spreads for over‐the‐counter stocks is examined. Option listings are hypothesized to impact spreads by affecting the inventory‐holding cost and/or the informed risk component of spreads. Univariate tests reveal that the commencement of options trading is accompanied by a statistically significant decline in percentage spreads. In addition, it is found that there is a significant rise in the average daily stock trading volume in the post‐option‐listing period, while there is no significant change in variance of the underlying stock returns in the short term. Regression results indicate that some stocks experience a decline in spreads even after controlling for changes in inventory‐holding costs. The univariate and regression results taken in conjunction indicate a favorable impact of option listings on both the inventory‐holding cost and informed‐trading risk components of spread determinants. The combined evidence suggests that initiation of options trading enhances the overall liquidity of the underlying stock.
The Journal of Financial Research – Wiley
Published: Dec 1, 1991
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