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The effect of option trading at the DTB on the underlying stocks' return variance

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Abstract

The effects of option trading at the DTB on the variance of the underlying stocks are examined. We use a new distribution free test being based on the empirical distribution functions. The evidence indicates that stock return variance increased after the introduction of the DTB. This effect can be partly explained by the strong increase in trading volume for option listed stocks. Our results stand in stark contrast to prior studies of both American and European financial markets.

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Authors and Affiliations

  1. Seminar für Staatswissenschaften and Seminar für Wirtschafts- und Sozialstatistik, Universität zu Köln, Albertus-Magnus-Platz, D-50923, Köln, Germany

    Burkhard Heer, Mark Trede & Mark Wahrenburg

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  1. Burkhard Heer
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  2. Mark Trede
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  3. Mark Wahrenburg
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Additional information

We thank two anonymous referees, F. Schmid, C. C. von Weizsäcker, Jürgen Wolters and the participants at the 7th World Congress of the Econometric Society (Tokyo), the 1995 Annual Meeting of the Verein für Socialpolitik (Linz) and the Economic Research Seminar of the University of Cologne for valuable comments.

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Heer, B., Trede, M. & Wahrenburg, M. The effect of option trading at the DTB on the underlying stocks' return variance. Empirical Economics 22, 233–245 (1997). https://doi.org/10.1007/BF01205357

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  • DOI: https://doi.org/10.1007/BF01205357

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