The Effect of Stock Market Indexing on Option Price Efficiency
Prof. Rachel MA, Assistant Professor in Finance, University of Macau
Date: 31 May 2023 (Wednesday)
Time: 3:00 pm – 4:30 pm
Host: Prof. Duncan LIU, Assistant Professor in Accounting
Online registration: https://umac.au1.qualtrics.com/jfe/form/SV_6DQZhIJe1BjAsh8
Using local linear regressions based on Russell index reconstitution, we examine how option price efficiency is affected by stock market indexing. We find that put-call parity deviation, a proxy for options price efficiency, is significantly smaller if a stock is at the top of the Russell 2000 index, compared with a similar-sized stock at the bottom of the Russell 1000 index. The stocks at the top of the Russell 2000 index also have higher options trading volume and smaller option bid-ask spreads. Our results collectively suggest that the stock market indexing effect improves the option price efficiency through higher options market liquidity.
Dr. Xiaorong Ma is an Assistant Professor of Finance at University of Macau. She received her PhD degree in Finance from The University of Hong Kong. She was an assistant professor at The National Taiwan University for a year before joining University of Macau. Her research interests lie at the intersection of corporate finance, corporate governance, and the financial markets. Dr. Ma has been publishing her research in academic journals including Journal of Accounting and Economics, Management Science, and Journal of Corporate Finance, among others.
All are welcome!