Article1989

Stock Splits, Volatility Increases, and Implied Volatilities

81 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

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.

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References

1973The Pricing of Options and Corporate Liabilities 1985Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 Through August 31, 1978 1984The valuation effects of stock splits and stock dividends 1977An analytic valuation formula for unprotected American call options on stocks with known dividends 1981Standard deviations implied in option prices as predictors of future stock price variability 1985Volatility increases subsequent to stock splits: An empirical aberration 1978COMMON STOCK VOLATILITY EXPECTATIONS IMPLIED BY OPTION PREMIA 1980Trading costs for listed options

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