Options and Market Friction

28 Pages Posted: 5 Mar 2011

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Tyler Brough

Utah State University

Date Written: March 4, 2011

Abstract

In this study we test whether the introduction of options decreases market friction using the Hou and Moskowitz (2006) measure of price delay. Consistent with theory in Ross (1976), we find that the availability of options increases the flow of market-wide information into stock prices. Indeed, we find that option trading activity drives the increase in the flow of information as post-listing option volume relates negatively with price delay. In additional tests, we find that delay’s return premium, documented in Hou and Moskowitz (2006), markedly decreases after options list and is further decreasing in the level of post-listing option volume. Our findings indirectly fail to find support for the argument that introducing speculation into markets, via options, destabilizes prices (Hart and Kreps, 1986; and Stein, 1987).

Keywords: Options, Friction, Price Delay

Suggested Citation

Blau, Benjamin M. and Brough, Tyler, Options and Market Friction (March 4, 2011). Available at SSRN: https://ssrn.com/abstract=1777184 or http://dx.doi.org/10.2139/ssrn.1777184

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Tyler Brough

Utah State University ( email )

Logan, UT 84322
United States

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