The impact of option introduction on the conditional return distribution of underlying securities

Abstract

AbstractThis paper combines several interesting econometric techniques to examine changes in the conditional return distribution of security returns following option introduction. An EGARCH model is used to characterize the return generating process. An intervention analysis is performed to determine whether the parameters of the EGARCH model shift following initial options listing. This paper finds that the conditional distribution of security returns is unaffected by option introduction. Estimation of a transfer function‐noise model also shows that option introduction has no effect on conditional volatility.