Finance Department, School of Business, Indiana University. This paper forms part of my Ph.D. dissertation written at the University of California, Berkeley. An earlier version of this paper was presented at the 1986 AFA meetings. I would like to thank Greg Connor, Roy Henriksson, James Hoag, Tee Lim, Michael Parkinson, Bruce Resnick, Ehud Ronn, Mark Rubinstein, Anand Vijh, Gautam Vora, and the referees for helpful comments and advice. Research support from the University of California and the Berkeley Program in Finance is gratefully acknowledged.
Stock Splits, Volatility Increases, and Implied Volatilities
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 5, pages 1361–1372, December 1989
How to Cite
SHEIKH, A. M. (1989), Stock Splits, Volatility Increases, and Implied Volatilities. The Journal of Finance, 44: 1361–1372. doi: 10.1111/j.1540-6261.1989.tb02658.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
A test of the efficiency of the Chicago Board Options Exchange, relative to post-split increases in the volatility of common stocks, is presented. The Black-Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations (ISDs) around split announcement and ex-dates. Comparisons with a control group of stocks find no relative increase in ISDs of stocks announcing splits. However, a relative increase is detected at the ex-date. Therefore, the joint hypothesis that 1) the Black-Scholes and Roll formulas are true and 2) the CBOE is efficient can be rejected.