[Research Seminar] Finance: “The index effect: Evidence from the Option Market” C. WESE SIMEN – University of Liverpool

Speaker: Chardin WESE SIMEN
University of Liverpool

Date and Location – Thursday May 11th 2023 from 12:00 to 13:30 on Zoom

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ABSTRACT

Equity options react significantly to S&P 500 index inclusions news. We document a significant and temporary increase in call option trading volume shortly after the news. On a placebo- and risk-adjusted basis, the 1-day response of the delta-hedged call options is positive (0.90%) and significant. Revisions in the implied volatility account for 42% of this effect. The announcement response is stronger for options that provide more leverage and reverses over time. The delta-hedged put options react in a similar manner. Our results are consistent with a demand-based option pricing theory.