Why do option introductions depress stock prices? : Heterogeneous beliefs, market-maker hedging, and short sales

168 Pages·1999·6.1 MB·English

by  Danielsen, Bartley R

WHYDOOPTIONINTRODUCTIONSDEPRESSSTOCKPRICES?
HETEROGENEOUSBELIEFS,MARKET-MAKERHEDGING,ANDSHORTSALES
By
BARTLEYR DANIELSEN
ADISSERTATIONPRESENTEDTOTHEGRADUATESCHOOL
OFTHEUNIVERSITYOFFLORIDAINPARTIALFULFILLMENT
OFTHEREQUIREMENTSFORTHEDEGREEOF
DOCTOROFPHILOSOPHY
UNIVERSITYOFFLORIDA
1999
Copyright1999
by
BartleyR.Danielsen
Tomyparents,AlbertandEleanor.
Theyencouragedcreativityandcuriosity.
Tomyguidingstar,Patricia.
Sheshinesbrightinthecoldandblackofnight
IthankGodforsharingtheradiancewithme.
ACKNOWLEDGMENTS
ThisdissertationwasinspiredbyconversationswithSorinSorescuandMark
Flannery, IamindebtedtoMarkFlannery,whoprovidedguidanceandredirectionon
manyoccasions. IwishtothankJayRitter,DaveBrown,JonHamilton,andM.
Nimalendranforhelpfulcommentsandsuggestions. Also,Ithankthevariousemployees
andtradersattheChicagoBoardOptionsExchangefortheirinsightsonthemarket
makingprocess.
IV
TABLEOFCONTENTS
page
ACKNOWLEDGMENTS
iv
LISTOFTABLES vii
LISTOFFIGURES ix
ABSTRACT x
CHAPTERS
INTRODUCTION
1 1
2 REVIEWOFLITERATURE 5
Introduction 5
OptionIntroductionLiterature 5
Short-saleLiterature 9
PapersDescribingDemandCurvesforCommonStock 12
3 INSTITUTIONALDETAILSCONNECTINGOPTIONS
ANDMARKETMAKERSHORT-SALES 15
4 ASIMPLEMODELOFSHORT-SALECONSTRAINTSWITH
HETEROGENEOUSINVESTORVALUATIONS 22
Introduction 22
Assumptions 23
TheModel 25
EvaluatingtheShort-saleConstraintOverpricingTerm 29
EmpiricalImplications 37
5 EMPIRICALTESTSOFDEMANDCURVEDETERMINANTS 38
Introduction 38
DataandSummaryStatistics 41
Cross-sectionalTestsonAbnormalReturns 49
Cross-sectionalTestsonEx-anteRelativeShortInterest 65
Cross-sectionalTestsonARSI 71
ARSIRegressedonAbnormalReturns 76
Summary 78
V
6 EMPIRICALTESTSINCORPORATINGSUPPLYCONSTRAINT
PROXIES 120
Introduction 120
TheoreticalUnderpinnings 121
PEmrpoixryicVaalriTaebsltess—foIrntCeornascttrianigntwiRtehlatxhaetPioUnTLeDvuelmsmy 112254
RobustnessChecks 130
EmpiricalTests-—InteractingwiththeTAUVariable 133
RobustnessChecks 137
SummaryandConclusions 139
7 SUMMARYANDCONCLUSIONS 151
REFERENCES 153
BIOGRAPHICALSKETCH 157
vi
LISTOFTABLES
Table page
5-1 DescriptiveStatistics-AbnormalReturnsbyYear 79
5-2 DescriptiveStatistics-AbnormalReturnsbyVariousCharacteristics 82
5-3 DescriptiveStatistics—ChangeinRelativeShortInterest 83
5-4 PercentageChangeinRelativeShortInterest-Onevs.TwoMonths(Post-
1980Introductions) 84
5-5 PercentageIncreaseinShortInterest(%Increase=SI(t+l)/SI(t-l)-l) 85
55--6 Model1:ExplainingAbnormalReturns 87
65--7 Models2and3:ExplainingAbnormalReturnswithPurgingRegressions 94
5-8 Models4and5:DetailingVolumeAnomaly 107
5-9 Model6:ExplainingEx-AnteRelativeShortInterest 109
5-10 Models7and8:ExplainingEARSIwithPurgingRegressions Ill
5-11 Model9:ExplainingChangesinRelativeShortInterest 113
5-12 Models10and11:ExplainingDRSIwithPurgingRegressions 115
13 Model12:ExaminingDRSIandAbnormalReturns 118
1 Model13:InteractingwiththePUTVariable-EffectsonAbnormal
Returns 140
6-2 Model14:InteractingwiththePUTVariable-DRSI 143
—
6-3 Model15:InteractionwithTau Effectsonabnormalreturns 145
—
6-4 Model16:InteractionwithTau EffectsonDRSI 148
vii
4- LISTOFFIGURES
5-
Figure page
2-1 Mean11-DayCumulativeAbnormalReturnuponOptionIntroduction 8
1. LambdaasaFunctionofStockPriceExpectations 32
1. GraphicalRepresentationofShort-saleConstraintEffects 40
5-2. AnnualMeanAbnormalReturnsandChangesinRelativeShortInterest 47
55--3. SDESUMBCoefficientEstimatesforIterativelySmallerSampleSizes
6- (Model4) 61
5-4. AdjustedR-SquaresforIterativelySmallerSampleSizes(Model4) 61
5-5. SUMBETACoefficientEstimatesforIterativelySmallerSampleSizes
(Model5) 64
5-6. AdjustedR-SquaresforIterativelySmallerSampleSizes(Model5) 64
5-7. Ex-AnteRelativeShortInterestasafunctionofBeta 71
8. ComparisonofanEventWindowwithShortInterestObservationDates 73
1. PartialEquilibriumModelofDemandCurveandShort-saleEffects
WhentheDispersionofExpectationsIncreases 123
viii
AbstractofDissertationPresentedtotheGraduateSchool
ofTheUniversityofFloridainPartialFulfillmentofthe
RequirementsfortheDegreeofDoctorofPhilosophy
WHYDOOPTIONINTRODUCTIONSDEPRESSSTOCKPRICES'’
HETEROGENEOUSBELIEFS,MARKET-MAKERHEDGING,ANDSHORT-SALES
By
BartleyR.Danielsen
May1999
Chairman:MarkJ.Flannery
MajorDepartment:Finance,Insurance,andRealEstate
Earlystudiesfoundthatoptionintroductionstendtoraisethepriceofthe
underlyingstock. Morerecentresearchindicatesthatpost-1980optionintroductions
causenegativereturnsintheunderlyingstock. Previously,increasedshort-saleactivities
followingoptionlistinghavebeennoted Thisdissertationpresentsboththeoreticaland
empiricalevidencethattheobservedincreasesinshortsellingarerelatedtotherecently
recognizednegativeabnormalreturns. Idevelopamodelthatidentifiesstocktradingand
marketcharacteristicsthatcanbeusedtopredictthemagnitudeofindividualstockprice
declines. Then,Itestthevalidityofthemodel. Iconcludethatex-antetrading
characteristicsarevaluableinpredictingthemagnitudeofthepricedeclineofthe
underlyingsecurityuponoptionintroduction.
Thecontributionsofthisdissertationarefour-fold. First,Iempiricallydocumenta
specificmechanismthroughwhichoptiontradingaffectsstockprices. Second,this
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dissertationrepresentsthefirstempiricaltestofcompetingtheoriesontheimpactofshort-
saleconstraintsonstockprices. Third,thedissertationdocumentsapreviouslyunknown
anomalousrelationshipbetweenex-anteobservablesecurity-specifictradingcharacteristics
andsubsequentabnormalreturns. Finally,myanalysisusesthepreviouslyunutilized
laboratoryofoptionlistingsforexaminingtheelasticityofdemandcurvesforcommon
stocks. Myresultsaddtotheaccumulatingbodyofevidenceonthepresenceof
downwardslopingdemandcurvesforindividualequitysecurities.
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