Time and dynamic Volume-Volatility Relation around Option Listing: Evidence from the French Underlying Stocks

We empirically investigate the impact of option listing on the underlying stock efficiency by looking at the volume-volatility relation of underlying stock. We use a time- consistent bivariate VAR (Vector Autoregressive Regression) model that includes time duration between trades. This model considers both the contemporaneous and the lagged relation between variables and is consistent with both theories of the informational flux and of the dispersions of beliefs. Besides, it is convenient framework to decompose volatility into two categories: informed and uninformed traders. We compare post-listing to pre-listing model results over a sample including 34 stocks for which options were listed between 1996 and 2006. Despite a significant rise of raw and diurnally adjusted price durations, we find evidence of a positive impact attributable to option listing on the underlying stock volume- volatility relation. This better adjustment to new information is observable jointly on contemporaneous and delayed relation. However, after decomposing volatility, we document no migration of informed traders to underlying stock market after option listing. The option effect seems to be not sufficient to attract informed traders into the underlying stock market. We conclude to the existence of option listing impact on the underlying stock efficiency, but to neutrality toward informed trading. We put forward four potential explanations for these findings.