Impact of stock option listings on return and risk characteristics in Finland

Abstract

This study investigates the impact of stock option introduction on the return and risk characteristics of underlying stocks in Finland. The results suggest that volatility and bid–ask spread levels are lower after the option listing. Furthermore, return series of stocks exhibit smaller positive first-order autocorrelation. It is found that the adverse selection component, as well as the order processing/inventory holding component of the bid–ask spread, decreases at an equal rate after the option introduction. These findings support the hypothesis that stock option market increases the efficiency of the underlying market in Finland.