The January Effect, Does Options Trading Matter?

Posted: 19 Apr 2013 Last revised: 2 May 2013

See all articles by Cameron Truong

Cameron Truong

Monash University; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2013

Abstract

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.

Keywords: January effect, informational efficiency, options trading

JEL Classification: G10, G11, G12, G14

Suggested Citation

Truong, Cameron, The January Effect, Does Options Trading Matter? (April 10, 2013). Australian Journal of Management, Vol. 38, No. 1, 2013, Available at SSRN: https://ssrn.com/abstract=2253337

Cameron Truong (Contact Author)

Monash University ( email )

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