The impact of index options on the underlying stocks: The evidence from the listing of Nikkei Stock Average options

This paper investigates the impact of the listing of options on the Nikkei Stock Average (NSA) on the volatility, bid-ask spread and trading volume for stocks listed in the First Section of the Tokyo Stock Exchange. Our results indicate that trading volume, volatility, and bid-ask spreads decline for the stocks contained in the Nikkei 225 Index after the listing of the index options. Cross-sectional regressions that control for changes in spread, volume, and price indicate that the options listing is associated with decreases in volatility for the index stocks. We conjecture that the observed results are consistent with the hypothesis that the advent of options trading causes a migration of speculative and market-wide information-oriented trading activity from the underlying market to the options market.