The January effect, does options trading matter?

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    This study examines the effect of options trading on the January effect in the period 1996-2009. The options market offers investors an alternative trading venue that circumvents several trading limitations in the equity market and hence enables a higher level of arbitrage activities. In a cross-sectional setting, we find that optioned stocks exhibit significantly lower risk-adjusted returns in January than non-optioned stocks. This effect is not attributed to firm size, illiquidity, or transaction costs. We also find that the January effect is not only smaller but also considerably more short-lived for optioned stocks than for non-optioned stocks. In a firm-specific setting, January risk-adjusted returns are found to be significantly lower in the post-options-listing period than in the pre-options-listing period. These findings support the proposition that options trading enhances information-based trading activities and hence improves the informational efficiency of the equity market.
    Original languageEnglish
    Pages (from-to)31 - 48
    Number of pages18
    JournalAustralian Journal of Management
    Issue number1
    Publication statusPublished - 2013

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