Kuldeep Shastri

The impact of international cross listings on risk and return: The evidence from American depository receipts

Abstract This paper examines the impact of the listing of American Depository Receipts (ADRs) on the risk and return of the underlying stocks. We find that the listing of ADRs is associated with positive abnormal returns to the underlying stock on the listing day. In addition, our results suggest that the listing of ADRs are associated with permanent increases in the return volatilities of the underlying stocks. We interpret this evidence as consistent with the existence of informed traders in the markets in which the ADRs and the underlying stocks trade.

Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques

The purpose of this paper is to compare a variety of approximation techniques for valuing contingent contracts when analytic solutions do not exist. The comparison is made with respect to the differences in both the approximation theory and the efficiency of the computation algorithms. The focus of the computational comparison is upon binomial and finite difference methods applied to option valuation models with one stochastic variable. However, many of the results would generalize to pricing corporate securities, and also to certain aspects of problems involving multiple stochastic variables.

The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis

We find that option listings are associated with a decrease in the variance of the pricing error, a decrease in the adverse selection component of the spread, and an increase in the relative weight placed by the specialist on public information in revising prices for the underlying stocks. We also find that there is a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size after option listings. Overall, our results suggest that option listings improve the market quality of the underlying stocks. Copyright The American Finance Association 1998.

Valuation of Foreign Currency Options: Some Empirical Tests

This paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the Black-Scholes model. The evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits. A second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market efficiency.

The Valuation Impacts of Specially Designated Dividends

This paper examines the valuation impacts of specially designated dividends (SDDs) by analyzing the behavior of stock and bond prices on dates surrounding their announcements. The evidence presented here suggests that SDDs are considered positive signals by the market, with (most of) the gains associated with their announcements accruing to stockholders. In addition, we present some evidence that the gain to stockholders is negatively related to the frequency of SDD announcements.

An Empirical Test of a Valuation Model for American Options on Futures Contracts

Pricing models for American call and put options on futures contracts are derived herein. These models are used to investigate the efficiency of the market for options on Standard & Poor 500 and German Mark futures. The evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices. In addition, it is shown that a hedging strategy originated at prices that indicate a deviation of market from model is successful in translating the observed mispricing into excess profits after transactions costs. However, these net profits are eliminated if the origination of the strategy is delayed by one trade, or if bid-ask spreads are accounted for.

The impact of index options on the underlying stocks: The evidence from the listing of Nikkei Stock Average options☆

Abstract This paper investigates the impact of the listing of options on the Nikkei Stock Average (NSA) on the volatility, bid-ask spread and trading volume for stocks listed in the First Section of the Tokyo Stock Exchange. Our results indicate that trading volume, volatility, and bid-ask spreads decline for the stocks contained in the Nikkei 225 Index after the listing of the index options. Cross-sectional regressions that control for changes in spread, volume, and price indicate that the options listing is associated with decreases in volatility for the index stocks. We conjecture that the observed results are consistent with the hypothesis that the advent of options trading causes a migration of speculative and market-wide information-oriented trading activity from the underlying market to the options market.

The early exercise of American puts

Abstract This paper shows that American puts on dividend paying stocks are most likely to be exercised either just after an ex-dividend date or just prior to expiration. At any other time the option to exercise an American put early may have less value. Thus, put writers and converters can predict when protection against premature exercise will be most valuable. The probability of early exercise is shown to be sensitive to managerial policy regarding the suspension of dividend payments, transaction costs, and interest rates. However, dividend payments are demonstrated to be the primary deterrent to early exercise.

Valuation of American options on foreign currency

Abstract Pricing models for American call and put options on foreign currency are derived herein. These models are used to investigate the efficiency of the market for foreign currency options. The evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices. In addition, it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits. However, these profits are eliminated if the strategy is executed at bid and offer prices.

The impact of the listing of options in the foreign exchange market

Abstract This paper documents the impact of the introduction of foreign currency options and options on foreign currency futures on the underlying securities. We find that the volatility of exchange rates decreases following the listing of options for a majority of the currencies under consideration. In addition, we find that trading volume and open interest in currency futures increases after option introduction. This evidence is consistent with the notion that derivative securities are important innovations for stabilizing and increasing liquidity in the market for the underlying assets.