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Title: Impact of seasoned equity and private placement disclosures on derivative prices: are the spot and option markets integrated?

Authors: Mohamed Ariff; Fan-Fah Cheng; Shamsher Mohamad

Addresses: University Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia ' University Putra Malaysia, 43400 UPM, Serdang, Selangor, Malaysia ' INCEIF, International Centre for Education in Islamic Finance, Jalan Universiti, Petaling Jaya, Selangor, Malaysia

Abstract: This paper reports evidence of significant abnormal returns in call and put options in the New York Stock Exchange around the disclosure time of two equity funding events. The delta values as risk of options are used to adjust gross returns of calls and puts to obtain adjusted abnormal returns. Theory suggests any stock price increases around private placement announcement dates would make calls to become in-the-money, so call prices should increase: conversely, puts would become out-of-money so put prices should be unaffected. Stock price declines around seasoned equity announcement dates would make put prices to increase since puts become in-the-money: call prices, having become out-of-money, would not change. Further, if the spot to the derivative market price impact is due to both markets being fully integrated, a trading strategy could yield profits. To test this, we apply cointegration and Granger-causality tests: we find there is no predictable spot-to-option-market integration in either direction. The empirical evidence of option price changes reported here and also evidence of no integration provide support for the idea that spot and option prices are being formed independently of each other, therefore prices are consistent with the efficient market hypothesis and the option pricing model.

Keywords: announcement effect; spillover; call/put prices; private placement; PP; seasoned equity offering; causality; integration.

DOI: 10.1504/IJBD.2017.083951

International Journal of Bonds and Derivatives, 2017 Vol.3 No.1, pp.44 - 70

Received: 20 Nov 2015
Accepted: 14 Mar 2016

Published online: 21 Apr 2017 *

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