IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v23y2013icp379-401.html
   My bibliography  Save this article

Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?

Author

Listed:
  • Chen, Yangyang
  • Koutsantony, Constantine
  • Truong, Cameron
  • Veeraraghavan, Madhu

Abstract

This study investigates the stock price response to Standard & Poor's (S&P) 500 index inclusions during the period 1996–2010 and the role of options listings and options trading volume with regard to the information content of index inclusion announcements. Specifically, we address the following questions: (1) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with options listings? and (2) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with a high level of options trading volume? Our findings indicate that options listings themselves are not related to the magnitude of abnormal returns from the announcements of S&P 500 inclusions. We also find that greater levels of options trading volume do not convey private information about the S&P 500 index changes. We document that any measurable impact of options trading on the stock price response to S&P 500 inclusion announcements lies primarily in the level of abnormal options trading volume in the period immediately preceding the announcements.

Suggested Citation

  • Chen, Yangyang & Koutsantony, Constantine & Truong, Cameron & Veeraraghavan, Madhu, 2013. "Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 379-401.
  • Handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:379-401
    DOI: 10.1016/j.intfin.2012.09.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443112000856
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.intfin.2012.09.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:59:y:2004:i:4:p:1901-1930 is not listed on IDEAS
    2. Jennings, Robert & Starks, Laura, 1986. "Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-125, March.
    3. repec:bla:jfinan:v:44:y:1989:i:2:p:509-13 is not listed on IDEAS
    4. Back, Kerry, 1993. "Asymmetric Information and Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-472.
    5. Kadlec, Gregory B & McConnell, John J, 1994. "The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings," Journal of Finance, American Finance Association, vol. 49(2), pages 611-636, June.
    6. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. "Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-270, March.
    7. Manaster, Steven & Rendleman, Richard J, Jr, 1982. "Option Prices as Predictors of Equilibrium Stock Prices," Journal of Finance, American Finance Association, vol. 37(4), pages 1043-1057, September.
    8. Harris, Lawrence E & Gurel, Eitan, 1986. "Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures," Journal of Finance, American Finance Association, vol. 41(4), pages 815-829, September.
    9. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    10. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2009. "Options trading activity and firm valuation," Journal of Financial Economics, Elsevier, vol. 94(3), pages 345-360, December.
    11. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," The Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January.
    12. Shleifer, Andrei, 1986. "Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-590, July.
    13. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    14. repec:bla:jfinan:v:59:y:2004:i:1:p:447-471 is not listed on IDEAS
    15. Figlewski, Stephen & Webb, Gwendolyn P, 1993. "Options, Short Sales, and Market Completeness," Journal of Finance, American Finance Association, vol. 48(2), pages 761-777, June.
    16. Beneish, Messod D & Whaley, Robert E, 1996. "An Anatomy of the "S&P Game": The Effects of Changing the Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1909-1930, December.
    17. Chern, Keh-Yiing & Tandon, Kishore & Yu, Susana & Webb, Gwendolyn, 2008. "The information content of stock split announcements: Do options matter?," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 930-946, June.
    18. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    19. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. "Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-1764, December.
    20. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    21. repec:bla:jfinan:v:44:y:1989:i:2:p:487-98 is not listed on IDEAS
    22. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    23. William B. Elliott & Richard S. Warr, 2003. "Price Pressure on the NYSE and Nasdaq: Evidence from S&P 500 Index Changes," Financial Management, Financial Management Association, vol. 32(3), Fall.
    24. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    25. Hans R. Stoll, 2000. "Presidential Address: Friction," Journal of Finance, American Finance Association, vol. 55(4), pages 1479-1514, August.
    26. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," The Journal of Business, University of Chicago Press, vol. 70(3), pages 351-383, July.
    27. repec:bla:jfinan:v:53:y:1998:i:2:p:717-732 is not listed on IDEAS
    28. repec:bla:jfinan:v:53:y:1998:i:2:p:431-465 is not listed on IDEAS
    29. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June.
    30. Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hacıbedel, Burcu, 2014. "Does investor recognition matter for asset pricing?," Emerging Markets Review, Elsevier, vol. 21(C), pages 1-20.
    2. Alexis Cellier & Pierre Chollet & Souad Lajili Jarjir, 2013. "New empirical evidence on market reactions to changes in Socially Responsible Investment indexes," Post-Print hal-01367120, HAL.
    3. Liu, Shinhua, 2011. "The price effects of index additions: A new explanation," Journal of Economics and Business, Elsevier, vol. 63(2), pages 152-165.
    4. Wang, Chuan & Murgulov, Zoltan & Haman, Janto, 2015. "Impact of changes in the CSI 300 Index constituents," Emerging Markets Review, Elsevier, vol. 24(C), pages 13-33.
    5. Bildik, Recep & Gulay, Guzhan, 2008. "The effects of changes in index composition on stock prices and volume: Evidence from the Istanbul stock exchange," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 178-197.
    6. Alejandro Bernales & Massimo Guidolin, 2013. "The Effects of Information Asymmetries on the Success of Stock Option Listings," Working Papers 484, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Schnitzler, Jan, 2018. "S&P 500 inclusions and stock supply," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 341-356.
    8. Konstantina Kappou & Ioannis Oikonomou, 2016. "Is There a Gold Social Seal? The Financial Effects of Additions to and Deletions from Social Stock Indices," Journal of Business Ethics, Springer, vol. 133(3), pages 533-552, February.
    9. William B. Elliott & Bonnie F. Van Ness & Mark D. Walker & Richard S. Warr, 2006. "What Drives the S&P 500 Inclusion Effect? An Analytical Survey," Financial Management, Financial Management Association International, vol. 35(4), pages 31-48, December.
    10. Chen, Wei-Kuang & Lin, Ching-Ting, 2016. "Asymmetric responses to stock index reconstitutions: Evidence from the CSI 300 index additions and deletions," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 36-48.
    11. Ken L. Bechmann, 2004. "Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index: The KFX Index," Multinational Finance Journal, Multinational Finance Journal, vol. 8(1-2), pages 3-34, March-Jun.
    12. Barberis, Nicholas & Shleifer, Andrei & Wurgler, Jeffrey, 2005. "Comovement," Journal of Financial Economics, Elsevier, vol. 75(2), pages 283-317, February.
    13. Kashyap, Anil K & Kovrijnykh, Natalia & Li, Jian & Pavlova, Anna, 2021. "The benchmark inclusion subsidy," Journal of Financial Economics, Elsevier, vol. 142(2), pages 756-774.
    14. Fernandes, Marcelo & Mergulhão, João, 2016. "Anticipatory effects in the FTSE 100 index revisions," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 79-90.
    15. Luke Bouffler & Amy Kwan & Lantian Liang & Richard Philip, 2023. "Do uninformed traders move prices? Evidence from the Bank of Japan's ETF purchasing program," The Financial Review, Eastern Finance Association, vol. 58(1), pages 5-18, February.
    16. Liu, Clark & Wang, Shujing & Wei, K.C. John, 2021. "Demand shock, speculative beta, and asset prices: Evidence from the Shanghai-Hong Kong Stock Connect program," Journal of Banking & Finance, Elsevier, vol. 126(C).
    17. Jiang, Hao & Vayanos, Dimitri & Zheng, Lu, 2020. "Tracking biased weights: asset pricing implications of value-weighted indexing," LSE Research Online Documents on Economics 118847, London School of Economics and Political Science, LSE Library.
    18. Ernest Biktimirov & Boya Li, 2014. "Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 95-122, January.
    19. Brooks, Chris & Kappou, Konstantina & Stevenson, Simon & Ward, Charles, 2013. "The performance effects of composition changes on sector specific stock indices: The case of European listed real estate," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 132-142.
    20. A. Bernales, 2014. "The Effects of Information Asymmetries on the Ex-Post Success of Stock Option Listings," Working papers 495, Banque de France.

    More about this item

    Keywords

    S&P 500 index; Options trading volume; Options listing informational efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:23:y:2013:i:c:p:379-401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.