Does options trading lead to greater cash market volatility?

Does options trading lead to greater cash market volatility? INTRODUCTION There has been much debate over the possible role of option and futures trading in the variability of cash markets. Despite the inconclusive (and even encouraging) nature of the evidence regarding the impact of options and futures trading activity, there has been a move toward increased regulation of these markets [See Bessembinder and Seguin (1992)l. Reconciling the relationship between derivative trading activity and the behavior of the underlying asset remains pivotal to whether or not the current regulatory measures an options and futures markets need to be reexamined. The purpose of this article is to examine the relationship between options trading activity on the S&P 100 Index and the variability of the 'Although it is by no means clear that regulators should be concerned about greater volatility in cash markets per se, some argue that higher volatility in cash prices reflected in higher costs of capital [see Edwards (1988b)l. w Arjun Chatrath is an Assistant Professor in the Department of Graduate Studies at Lake Erie College. w Sanjay Ramchander is an Assistant Professor in the Department of Finance at Coppin State CoZlege. w Frank Song is an Assistant Professor in the Department of Economics at Cleveland State http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Does options trading lead to greater cash market volatility?

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Publisher
Wiley
Copyright
Copyright © 1995 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
D.O.I.
10.1002/fut.3990150704
Publisher site
See Article on Publisher Site

Abstract

INTRODUCTION There has been much debate over the possible role of option and futures trading in the variability of cash markets. Despite the inconclusive (and even encouraging) nature of the evidence regarding the impact of options and futures trading activity, there has been a move toward increased regulation of these markets [See Bessembinder and Seguin (1992)l. Reconciling the relationship between derivative trading activity and the behavior of the underlying asset remains pivotal to whether or not the current regulatory measures an options and futures markets need to be reexamined. The purpose of this article is to examine the relationship between options trading activity on the S&P 100 Index and the variability of the 'Although it is by no means clear that regulators should be concerned about greater volatility in cash markets per se, some argue that higher volatility in cash prices reflected in higher costs of capital [see Edwards (1988b)l. w Arjun Chatrath is an Assistant Professor in the Department of Graduate Studies at Lake Erie College. w Sanjay Ramchander is an Assistant Professor in the Department of Finance at Coppin State CoZlege. w Frank Song is an Assistant Professor in the Department of Economics at Cleveland State

Journal

The Journal of Futures MarketsWiley

Published: Oct 1, 1995

References

  • Futures Trading Activity and Stock Price Volatility
    Bessembinder, Bessembinder; Seguin, Seguin
  • Futures Trading and Cash Market Volatility: Stock Index and Interest Rate Futures
    Edwards, Edwards
  • Futures Trading and Volatility in the GNMA Market
    Figlewski, Figlewski
  • S&P 500 Cash Stock Price Volatilities
    Harris, Harris

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