The Informational Role of Stock and Option Volume

Chan, Kalok; Chung, Y. Peter; Fong, Wai‐Ming

doi:10.1093/rfs/15.4.1049

Cited by 276 publications

(106 citation statements)

References 33 publications

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“…Several recent studies examine the informational role of the volume of option and stock trades in predicting the future stock price movements (Llorence et al, 2002;Chan, Chung and Fong, 2002;Easley, O'Hara and Srinivas, 1998;Hasbrouck, 1991). Black (1975) and Mayhew, Sarin and Shastri (1995) argue that lower transaction costs and greater financial leverage of the options markets may induce informed traders to trade in the option market rather than in the stock market.…”

Section: Introductionmentioning

confidence: 99%

The Informational Role of Option Trading Volume in Equity Index Options Markets

Sarwar

2005

Rev Quant Finan Acc

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This paper examines the dynamic relations between future price volatility of the S&P 500 index and trading volume of S&P 500 options to explore the informational role of option volume in predicting the price volatility. The future volatility of the index is approximated alternatively by implied volatility and by EGARCH volatility. Using a simultaneous equation model to capture the volume-volatility relations, the paper finds that strong contemporaneous feedbacks exist between the future price volatility and the trading volume of call and put options. Previous option volumes have a strong predictive ability with respect to the future price volatility. Similarly, lagged changes in volatility have a significant predictive power for option volume. Although the volume-volatility relations for individual volatility and volume terms are somewhat different under the two volatility measures, the results on the predictive ability of volume (volatility) for volatility (volume) are broadly similar between the implied and EGARCH volatilities. These findings support the hypothesis that both the information- and hedge-related trading explain most of the trading volume of equity index options. Copyright Springer Science + Business Media, Inc. 2005option volume, future volatility,

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Section: Introductionmentioning

confidence: 99%

The Informational Role of Option Trading Volume in Equity Index Options Markets

Sarwar

2005

Rev Quant Finan Acc

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“…Early studies, e.g., Manaster and Rendleman Jr. (1982) and Bhattacharya (1987) find that options market leads the underlying asset market in revealing information, but more recent studies, e.g., Stephan and Whaley (1990), Chan, Chung, and Johnson (1993), Easley, O'Hara, and Srinivas (1998), Jarnecic (1999), Chan, Chung, and Fong (2002) and Chakravarty, Gulen, and Mayhew (2004), have essentially reversed the conclusion.…”

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confidence: 97%

Price discovery in the U.S. stock and stock options markets: A portfolio approach

Holowczak

Simaan

2007

Rev Deriv Res

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Option prices vary with not only the underlying asset price, but also volatilities and higher moments. In this paper, we use a portfolio of options to seclude the value change of the portfolio from the impact of volatility and higher moments. We apply this portfolio approach to the price discovery analysis in the U.S. stock and stock options markets. We find that the price discovery on the directional movement of the stock price mainly occurs in the stock market, more so now than before as an increasing proportion of options market makers adopt automated quoting algorithms. Nevertheless, the options market becomes more informative during periods of significant options trading activities. The informativeness of the options quotes increases further when the options trading activity generates net sell or buy pressure on the underlying stock price, even more so when the pressure is consistent with deviations between the stock and the options market quotes. Copyright Springer Science+Business Media, LLC 2006Price discovery, Options, Stocks, Put-call parity, Automated quoting, Options trade,

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“…Moreover, an impressive range of researchers (see Manaster and Rendleman 1982, Chan et al 2002, Mayhew and Stivers 2003, Chakravarty et al 2004, Pan and Pote sh man 2006, Ni et al 2008, Taylor et al 2010, Pathak et al 2015 examine such inter-linkages across markets at firm level and provide mixed evidence of information content in prices and trading activity of the options market. However, our paper differs from existing studies on several grounds.…”

Section: Literature Reviewmentioning

confidence: 99%

Predictability and Predictors of Volatility Smirk: A Study on Index Options

Pathak

Mitra

2017

Business: Theory and Practice

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The purpose of this study is to examine the presence of volatility smirk anomaly in index options and its predictability for future returns. The study tests the temporal properties of volatility smirk and further explores the factors determining the anomaly. The daily volatility smirk is computedfor the period 2004–2014 and the first lag of smirk is used in generalized least square (GLS) estimation framework, with set of control variables in two different specifications, to test the predictability as well as the determinants of volatility smirk. The study reports significant presence of volatility smirk in index options with an auto–regressive structure. Smirk predicts marginal returns and the predictability is robust to the control of major risk factors. It is also found that open interest of calls and puts, along with market risk premium and momentum premium, act as significant predictor of volatility smirk. The results are helpful in enhancing returns on investment in Index based funds and designing options strategies from the perspective of volatility risk. The study is first of its kind in the Indian market examining the reasons and consequences of existence of volatility smirk in index options.

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The Informational Role of Stock and Option Volume

Cited by 276 publications

References 33 publications

The Informational Role of Option Trading Volume in Equity Index Options Markets

The Informational Role of Option Trading Volume in Equity Index Options Markets

Price discovery in the U.S. stock and stock options markets: A portfolio approach

Predictability and Predictors of Volatility Smirk: A Study on Index Options

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