Equity Options and Underlying Stocks' Behavior: Further Evidence from Japan*

Abstract

ABSTRACTIn an incomplete market, introduction of options could affect the underlying stocks' market behavior. We further examine the various impacts of the advent of equity options, using a recent sample of equity options in Japan. We find that option listings in Japan lead to significant increases in price and volatility, relative to a control sample matched by probability of listing, despite that equity options were launched after the index options in Japan. We discuss the apparent differences in the price and volatility effects across the markets, and conclude that differences in regulatory environments might be responsible.