TITLE:
Does Introduction of Stock Options Impact Stock Volatility? Empirical Evidence from Underlying Stocks in Indian Market
AUTHORS:
Himanshu Joshi
KEYWORDS:
Single Stock Options, Volatility, GARCH (1, 1)
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.10,
June
21,
2018
ABSTRACT: Present study investigates the impact of single
stock option trading on the volatility of the underlying stocks in Indian
market using data of companies listed on National Stock Exchange (NSE) of
India. The daily stock price data for a period of 1 year prior and post option
introduction is extracted for 166 companies which offer options trading on the
platform of NSE. Pre and post volatility of the underlying stocks is measured
using standard deviation and GARCH (1, 1) model. Then the sample has been split
into three groups based on the market capitalization of the stocks, i.e., large cap, mid cap, and small cap.
Pre and post option listing volatility was tested for three groups separately.
The highest average volatility is recorded for large cap stocks, followed by
mid cap, and lowest for small cap stocks using GARCH (1, 1) model. This
contrasts with the results of daily variance, as variance is highest for the
small cap, followed by large cap and lowest for mid cap firms. Results show
that for the large cap firms, volatility increases after the option listing,
using both the measure of measures of volatility; and statistically
insignificant decline has been recorded in the daily variance and average
long-run volatility measure (VL) using GARCH (1, 1) model for mid
cap, and small cap firms.