Although many empirical studies have examined the impacts of introducing new derivatives on the underlying market, the results are still inconclusive. On one hand, some studies support the view that introducing new derivatives would help improve the liquidity and stability of the underlying assets. Chatrath, Kamath, Chakornpipat andRamchander (1995), and Liu (2007) both find that S&P100 stock index options trading have stabilized and improve the liquidity of the underlying stock market. The listing of the S&P100 options results inhigher liquidity and lower volatility. Liu also notice that the index derivativelisting induces informed and speculative traders to migrate from the underlying market to the derivative market. Kumar et al. (1995) find that volatility and bid-ask spread decline for the stocks contained in the Nikkei 225 Index after thelisting of the index options.Specifically, after using cross-sectional regressions controlling for variations in volume, spread, and price, option listing is associated with the decrease in volatility for index stocks. Pilar& Rafael (2002) show that due to the introduction of futures and options, the conditional volatility of the underlying index declines. They also find that the trade volume of Ibex-35 also increases significantly in the Spanish market. Shenbagaraman(2003) suggest that index futures and
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options listing not only improves the liquidity and reduces information asymmetry, but also find there is no evidence of any connection between trading activity in derivative market and spot market volatility. Chen and Chung (2011) show that the introduction of SPDR options improves the liquidity of SPDRs and reduces implicit trading costs. It also leads to a significant improvement of information shares of SPDRs.
On the other hand, Jegadeeshand Subrahmanyam(1993) find a higher spread and volatility of its underlying assets,controlling for changes in other spread determinants, after the listing of S&P 500 futures. Lamoureux andPannikath (1994), Freund, McCann and Webb (1994) and Bollen(1998) find that the impact of index options listings on volatility is not consistent over time. Wei, Poon and Zee (1997) findboth volume and price volatility increase for options on OTC marketfor a sample of 144 stocks in the USA.Price volatility still increase even controlling for volume, insider trading, andspreads.The evidence of spreads is mixed in their sample.Hason and Chowdhury (2011) also note that the effects of the introduction of index options are different in Asian stock markets. Only selected stock markets have an increase in their stock return volatility and liquidity.
Weekly options provide additional room, other than monthly index options, for speculators, hedgers, and informed traders so that they can migrate from stock option market to index option market. As suggested by Kumar et al.(1995), the increase in liquidity trading might not offset the decrease in speculative and informed trading after option listing, causing the decrease in trading volume. Moreover, this migration of volume also means that information asymmetry would lessen in the underlying market so that spread and volatility might decrease. Therefore, this study anticipates that introducing weekly options would decrease the volume and liquidity of monthly options, and the price volatility of the spot market because the speculative and hedging trading activities might decrease in the spot market.
The idea of short maturity option is also strongly related to the expiration day effect
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which is proposed by Stoll and Whaley (1987, 1990, 1991) who argued that many arbitrageurs liquidate their holdings of underlying stocks at the same time as the expiration of the index futures and options contracts, causing large price swings and abnormal trading volumes. The model developed by Kumar and Seppi (1992) suggests that traders are incentivized to establish futures positions and then trade in the spot market to manipulate the prices of the underlying constituent stocks in order to accrue profits around the expiration day.Chung and Hseu (2008) show that there are significant price reversal, volatility and abnormal volume stemming from the expiration of MSCI-TW futures market. Chou et al. (2012) suggests that both volatility and trading volume are higher on the final settlement days in Taiwan.
Above all, the first hypothesis in this study is that the introduction of weekly options would take over the volume of monthly options, causing a decrease in its volume.Alike some previous empirical studies, the introduction of new derivatives usually results in a lower traded volume of the underlying securities. This study expect that weekly option listing would have those hedgers, speculators, and some certain traders transfer part of their positions in monthly options to weekly options and therefore decrease the volume of monthly options.The second hypothesis is that there would be a decrease in the liquidity of monthly options because of the decrease in the volume. Although the traded volume of monthly options decreases, the variation of bid-ask spread is still uncertain. In general, as volume of an security decrease, its bid-ask spread would broaden, which results in worse liquidity.The third hypothesis isthe price volatility of the underlying security would decrease due to the decrease in information asymmetry. In an imperfect market, the lower transaction costs and greater leverage of options market might attract more informed traders and then make the market become more informational efficient (e.g. Ross (1977), Grossman (1988)). The forth hypothesis is that these impacts might be not apparent near settlement days because the expiration day effects on monthly and weekly options would somewhat overlapped with the impacts. The abnormal volume and price swing during settlement periods make it hard to
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distinguish between the impacts of weekly option listing and the expiration day effects.
Therefore, it is anticipated that the impacts of weekly options would not be apparent near settlement days