The listing effects of options on U.S. treasury interest

The option-listing effect refers to the behavior of an underlying stock or asset after exchange-traded options begin trading on that underlying stock or asset, i.e., are listed, relative to the behavior before the listing. Many researchers have investigated this effect with respect to stocks and related assets like American depository receipts (ADRs) in a variety of markets. We find evidence of an option-listing effect when the Chicago Board Options Exchange (CBOE) introduced options on US Treasury interest rates.  The CBOE introduced United States Treasury bill rate or short term rate (IRX) options in 1989.  Four years later, the CBOE introduced options on the 5-year (FVX), 10-year (TNX), and 30-year (TYX) rates in 1993.  We use interest-data obtained from the Federal Reserve and other market data from the Center for Research in Security Prices (CRSP) to perform event studies on each time series to determine if there was a significant option-listing effect in each case.  In the case of the IRX, the option-listing effect is congruous with the patterns observed around the listing of options on specific stocks and ADRs since 1981.  The level and volatility of the Treasury Bill rate is lower in the period after the listing compared to the period before.  In the case of the longer term rates, the FVX, TNX and TYX, the rates increased.  The latter observation is congruous with patterns observed with equities in the period prior to 1981.  Measuring and comparing the differences in the option-listing effects on interest rates will help researchers and practitioners understand the nature of the effect and why it might be different for various assets at different points in time.