The impact of CBOE options listing on the volatility of NYSE traded stock: a time varying risk approach

Abstract

This paper employs the standard General Auto-regressive Conditional Heteroskedasticity (GARCH(1,1)) process to examine the impact of option listing on volatility the underlying stocks. It takes into consideration the time variation in the individual stock's variance and explicitly tests whether option listing causes any permanent volatility change. It also investigates the impact of option listing on the speed at which information is incorporated into the stock price. The study uses clean samples to avoid sample selection biases and control samples to account for the change in the volatility and/or information flows that may be caused by factors other than option listing.