Effects of Option Introduction on Price and Volatility of Underlying Assets - A Review

Abstract

The effect of options’ introduction on underlying market is one of the frequently debated themes in financial research. A significant body of literature addresses the question of effects of options’ introduction. The critical review of the literature shows that there is no consensus among scholars regarding the impact. Theoretically, it has been argued that the option market stabilizes the underlying market. Though the empirical evidences of stabilization effect have not lead to a consensus, but there is little evidence for the destabilization effect of options. Given increasing growth of options in financial market especially in emerging markets, the future studies from these markets may shed new light on the debate.

Keywords: Derivatives, Options, Price impact, volatility, destabalization, market efficiency, effects of derivatives

JEL Classification: G15, C49