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Stock Splits, Volatility Increases, and Implied Volatilities

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  • Sheikh, Aamir M

Abstract

A test of the efficiency of the Chicago Board Options Exchange, relative to postsplit increases in the volatility of common stocks, is presented. The Black-Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations around split announcement and ex-dates. Comparisons with a control group of stocks find no relative increase in the implied standard deviations of stocks announcing splits. However, a relative increase is detected at the ex-date. Therefore, the joint hypothesis that (1) the Black-Scholes and Roll formulas are true and (2) the Chicago Board Options Exchange is efficient can be rejected. Copyright 1989 by American Finance Association.

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  • Sheikh, Aamir M, 1989. "Stock Splits, Volatility Increases, and Implied Volatilities," Journal of Finance, American Finance Association, vol. 44(5), pages 1361-1372, December.
    • Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1361-72
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    Cited by:

    1. Grace Phang & Rob Brown, 2011. "Rational early exercise of call options: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 732-744, September.
    2. Semir Ben Ammar, 2020. "Catastrophe Risk and the Implied Volatility Smile," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 381-405, June.
    3. A. W. Rathgeber & J. Stadler & S. Stöckl, 2021. "The impact of the leverage effect on the implied volatility smile: evidence for the German option market," Review of Derivatives Research, Springer, vol. 24(2), pages 95-133, July.
    4. Jeffrey Jones & Jenny Gu & Pu Liu, 2014. "Do dividend initiations signal a reduction in risk? Evidence from the option market," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 143-158, January.
    5. Isakov, Dusan & Perignon, Christophe, 2001. "Evolution of market uncertainty around earnings announcements," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1769-1788, September.
    6. Gary E. Powell & H. Kent Baker, 1993. "The Effects Of Stock Splits On The Ownership Mix Of A Firm," Review of Financial Economics, John Wiley & Sons, vol. 3(1), pages 70-88, September.
    7. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    8. Erik Devos & William B. Elliott & Richard S. Warr, 2018. "The Propensity to Split and CEO Compensation," Financial Management, Financial Management Association International, vol. 47(1), pages 105-129, March.
    9. Thisari K. Mahanama & Abootaleb Shirvani & Svetlozar Rachev & Frank J. Fabozzi, 2023. "The Financial Market of Environmental Indices," Papers 2308.15661, arXiv.org.
    10. Ben Ammar, Semir, 2016. "Pricing of Catastrophe Risk and the Implied Volatility Smile," Working Papers on Finance 1617, University of St. Gallen, School of Finance.
    11. Kian-Guan Lim & Christopher Ting, 2012. "The term structure of S&P 100 model-free volatilities," Quantitative Finance, Taylor & Francis Journals, vol. 13(7), pages 1041-1058, November.
    12. Wing-Keung Wong & Howard Thompson & Kweehong Teh, 2011. "Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?," Multinational Finance Journal, Multinational Finance Journal, vol. 15(1-2), pages 1-46, March - J.
    13. Donders, Monique W. M. & Vorst, Ton C. F., 1996. "The impact of firm specific news on implied volatilities," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1447-1461, November.
    14. Peress, Joel, 2010. "The tradeoff between risk sharing and information production in financial markets," Journal of Economic Theory, Elsevier, vol. 145(1), pages 124-155, January.
    15. Dan W. French & Paula L. Varson & Kenneth P. Moon, 2005. "Capital Structure and the Ex-Dividend Day Return," The Financial Review, Eastern Finance Association, vol. 40(3), pages 361-379, August.
    16. Ravi Dhar & William Goetzmann & Ning Zhu & EFA Moscow, 2004. "The Impact of Clientele Changes: Evidence from Stock Splits," Yale School of Management Working Papers ysm369, Yale School of Management, revised 01 Sep 2009.
    17. Thilini Mahanama & Abootaleb Shirvani & Svetlozar Rachev, 2022. "A Natural Disasters Index," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 24(2), pages 263-284, April.
    18. Sergey Nasekin & Wolfgang Karl Hardle, 2020. "Model-driven statistical arbitrage on LETF option markets," Papers 2009.09713, arXiv.org.
    19. Thilini V. Mahanama & Abootaleb Shirvani & Svetlozar Rachev, 2023. "The Financial Market of Indices of Socioeconomic Wellbeing," Papers 2303.05654, arXiv.org.
    20. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    21. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.

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