Option listing, returns and volatility: evidence from Greece

Abstract

This study examines the effect of the first introduction of Greek stock options (Greek Telecommunication Organisation, Intracom, National Bank of Greece and Alpha Bank) on stock prices and volatility for the period 1999 to 2002. We examine the asymmetric information hypothesis using a standard event study methodology and asymmetric Generalized Autoregressive Conditional Heteroscedasticity (GARCH) type models. Event study results indicate that abnormal returns existed in the prelisting period, but tend to disappear in the post listing period. Asymmetric component Threshold Generalized Autoregressive Conditional Heteroscedasticity (TGARCH) models with Generalized Error Distribution (GED) show that the introduction of stock options has led to increased volatility (positive effect) for Greek Telecommunication Organisation, Intracom and National Bank of Greece only (Alpha Bank shows a positive but insignificant effect). We argue that our results provide support to the asymmetric information hypothesis, suggesting that the Greek market has become more efficient after the introduction of stock options.

Keywords:

• stock options
• returns
• volatility
• asymmetric component GARCH
• Greece

JEL Classification::

• G15
• C32

Notes

¹ Stock options are contracts that grant the holder the right to buy or sell a specific stock at a specific price before the contract expires. Holders of individual stocks can hedge their risk by trading stock options (for more details see Chen and Chang, 2008).

² Cox (1976) defines information content as knowledge regarding random disturbances having an impact on demand in the real economy (Dawson and Staikouras, 2009)

³ To estimate AGARCH models, an iterative procedure is used upon the method of Marquardt algorithm, and Heteroscedasticity Consistent Covariance (HCC) option is used to compute Quasi-Maximum Likelihood (QML) covariances and SEs using the methods described by Bollerslev and Wolldridge (1992).

⁴ Results from TGARCH, EGARCH and PGARCH are qualitatively similar to ACARCH results and they are available upon request.

⁵ The results from the GARCH models using pre- and post samples are available upon request.