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How Do Exchanges Select Stocks for Option Listing?

Authors

  • Stewart Mayhew,

  • Vassil Mihov

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    • Mayhew is at the U.S. Securities and Exchange Commission and the University of Georgia and Mihov is at Texas Christian University. For their helpful comments, we would like to thank an anonymous referee; Chris Barry; Rick Green; Steve Mann; Anand Srinivasan; Andy Waisburd; and seminar participants at the University of Cincinnati, the 2000 Frank Batten Young Scholars Conference at the College of William and Mary, and the 2000 meetings of the Financial Management Association. We would like to thank Seoungpil Ahn and Eric Rincones for valuable research assistance. Mayhew thanks the Institute for Quantitative Research in Finance (the Q group) for financial support. Mihov thanks the Charles Tandy American Enterprise Center and the Luther King Capital Management Center for Financial Studies at TCU for financial support. The U.S. Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This study expresses the authors' views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

ABSTRACT

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.

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