Stock Splits, Volatility Increases, and Implied Volatilities
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- Author(s): AAMIR M. SHEIKH
- Published: Apr 30, 2012
- Pages: 1361-1372
- DOI: 10.1111/j.1540-6261.1989.tb02658.x
A test of the efficiency of the Chicago Board Options Exchange, relative to post‐split increases in the volatility of common stocks, is presented. The Black‐Scholes and Roll option pricing formulas are used to examine the behavior of implied standard deviations (ISDs) around split announcement and ex‐dates. Comparisons with a control group of stocks find no relative increase in ISDs of stocks announcing splits. However, a relative increase is detected at the ex‐date. Therefore, the joint hypothesis that 1) the Black‐Scholes and Roll formulas are true and 2) the CBOE is efficient can be rejected.