The effect of stock market indexing on option market conditions

Eric C. Chang; Li Ge; Tse-Chun Lin; Xiaorong Ma

doi:10.1016/j.finmar.2025.101026

Journal of Financial Markets Vol. 78 2026

The effect of stock market indexing on option market conditions

Eric C. Chang^1,2; Li Ge ³; Tse-Chun Lin⁴; Xiaorong Ma ⁵

¹ Shanghai Jiao Tong University · ² Shanghai Advanced Research Institute · ³ Monash University · ⁴ University of Hong Kong · ⁵ University of Macau

open access

Abstract

We analyze the impact of stock market indexing on option market conditions using local linear regressions on Russell Index reconstitution. Our findings reveal that put-call parity deviations are significantly smaller for stocks at the top of the Russell 2000 Index, compared to those at the bottom of the Russell 1000 Index. Those top Russell 2000 stocks also exhibit higher trading option volume and narrower bid-ask spreads. Our results suggest that stock market indexing enhances option market conditions through increased liquidity, reducing hedging costs that benefit market makers.

DOI: 10.1016/j.finmar.2025.101026
Volume: 78
Pages: 101026
Language: en
Sources: crossref openalex

The effect of stock market indexing on option market conditions

Abstract

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