The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Competition, Market Structure, and Bid‐Ask Spreads in Stock Option Markets
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00447
Stewart Mayhew
This paper examines the effects of competition and market structure on equity option bid‐ask spreads from 1986 to 1997. Options listed on multiple exchanges have narrower spreads than those listed on a single exchange, but the difference diminishes as option volume increases. Option spreads become wider when a competing exchange delists the option. Options traded under a “Designated Primary Marketmaker” (DPM) have narrower quoted spreads than those traded in a traditional open outcry crowd. Effective spreads are found to be slightly narrower under the DPM than in the crowd, but only since 1992, and only on low‐volume options.
Book Reviews
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00127
Stewart Mayhew, Frank Packer
How Do Exchanges Select Stocks for Option Listing?
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00638.x
Stewart Mayhew, Vassil Mihov
We investigate the factors influencing the selection of stocks for option listing. Exchanges tend to list options on stocks with high trading volume, volatility, and market capitalization, but the relative effect of these factors has changed over time as markets have evolved. We observe a shift from volume toward volatility after the moratorium on new listings ended in 1980. Using control sample methodology designed to correct for the endogeneity of option listing, we find no evidence that volatility declines with option introduction, in contrast to previous studies that do not use control samples.
The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity‐Option Margin Requirements
Published: 12/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb05191.x
STEWART MAYHEW, ATULYA SARIN, KULDEEP SHASTRI
We examine the impact of changes in equity‐option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.
Informed Trading in Stock and Option Markets
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00661.x
Sugato Chakravarty, Huseyin Gulen, Stewart Mayhew
We investigate the contribution of option markets to price discovery, using a modification of Hasbrouck's (1995) “information share” approach. Based on five years of stock and options data for 60 firms, we estimate the option market's contribution to price discovery to be about 17% on average. Option market price discovery is related to trading volume and spreads in both markets, and stock volatility. Price discovery across option strike prices is related to leverage, trading volume, and spreads. Our results are consistent with theoretical arguments that informed investors trade in both stock and option markets, suggesting an important informational role for options.