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The January effect, does options trading matter?

Author

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  • Cameron Truong
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. JEL classifications: G10, G11, G12, G14

Suggested Citation

  • Cameron Truong, 2013. "The January effect, does options trading matter?," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 31-48, April.
    • Handle: RePEc:sae:ausman:v:38:y:2013:i:1:p:31-48
    DOI: 10.1177/0312896212440267
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    References listed on IDEAS

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    More about this item

    Keywords

    January effect; informational efficiency; options trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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