Why Does the Option to Stock Volume Ratio Predict Stock Returns?

Ge, Li; Lin, Tse-Chun; Pearson, Neil D.

doi:10.2139/ssrn.2329714

Cited by 34 publications

(51 citation statements)

References 14 publications

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“…This might suggest that insider trades are usually executed at the open of the market. Also, this result corroborates the evidence in Johnson and So (2012) and Ge et al (2015).…”

Section: Additional Testssupporting

confidence: 91%

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Chasing Private Information

Kacperczyk

Pagnotta

2019

The Review of Financial Studies

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Using over 5,000 trades unequivocally based on nonpublic information about firm fundamentals, we find that asymmetric information proxies display abnormal values on days with informed trading. Volatility and volume are abnormally high, whereas illiquidity is low, in equity and option markets. Daily returns reflect the sign of private signals, but bid-ask spreads are lower when informed investors trade. Market makers’ learning under event uncertainty and limit orders help explain these findings. The cross-section of information duration indicates that traders select days with high uninformed volume. Evidence from the U.S. SEC Whistleblower Reward Program and the FINRA involvement addresses selection concerns. Received January 11, 2017; editorial decision December 17, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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“…This might suggest that insider trades are usually executed at the open of the market. Also, this result corroborates the evidence in Johnson and So (2012) and Ge et al (2015).…”

Section: Additional Testssupporting

confidence: 91%

“…Signed OS Measures We follow Ge et al (2015) and consider separate OS measures based on trade characteristics that can be identified using International Securities Exchange (ISE) data:…”

Section: Price-based Measuresmentioning

confidence: 99%

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Kacperczyk

Pagnotta

2019

The Review of Financial Studies

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“…Easley, O’Hara, and Srinivas () argue that option markets are an alternative venue for informed traders. This is supported by the empirical evidence that option markets lead stock markets (see, e.g, An, Ang, Bali, & Cakici, ; Cremers & Weinbaum, ; Ge, Lin, & Pearson, ; Johnson & So, ; Xing, Zhang, & Zhao, ).…”

mentioning

confidence: 66%

“…Option‐based variables provide an instrument to identify winners/losers with a price underreaction to good/bad information. This is because informed traders may prefer to trade in option markets due to the embedded leverage in options and the ease of taking a synthetic short position (Black, ; Easley et al, ; Figlewski & Webb, ; Ge et al, ; Johnson & So, ). If informed traders perceive that winners’/losers’ prices underreact to prior good/bad information, they can buy calls/puts or sell puts/calls.…”

Section: Theoretical Background and Literature Reviewmentioning

confidence: 99%

Improving momentum strategies using residual returns and option‐implied information

Liu

2018

Journal of Futures Markets

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This paper provides an alternative method for enhancing momentum profits by combining residual returns and option‐implied information. The results show that the main benefit of applying residual returns to construct momentum portfolios is generating stable returns. Additionally, the incorporation of implied volatility (IV) spread or IV skew into a residual momentum portfolio is found to significantly raise profits, particularly during bad times and high‐sentiment periods. This is because IV spread and IV skew can dissociate winners/losers with a price underreaction from those with a price overreaction, which suggests that informed traders who perceive price underreactions/overreactions trade in option markets.

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“…For example, Pan and Poteshman (2006) report that put-call volume ratios are predictive of future stock returns and attribute this finding to informed trading in options markets. Johnson and So (2012) and Ge, Lin, and Pearson (2016) find that option-to-stock volume ratios contain predictive information for stock returns and attribute their results to informed trading in options markets. However, my paper makes a unique contribution to the literature by introducing a volume-based measure of informed trading with respect to future variance.…”

Section: Introductionmentioning

confidence: 99%

Variance disparity and market frictions

Park

2020

Journal of Econometrics

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This paper introduces a new model-free approach to measuring the expectation of market variance using VIX derivatives. This approach shows that VIX derivatives carry different information about future variance than S&P 500 (SPX) options, especially during the 2008 financial crisis. I find that the segmentation is associated with frictions such as funding illiquidity, market illiquidity, and asymmetric information. When they are segmented, VIX derivatives contribute more to the variance discovery process than SPX options. These findings imply that VIX derivatives would offer a better estimate of expected variance than SPX options, and that a measure of segmentation may be useful for policymakers as it signals the severity of frictions.

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Why Does the Option to Stock Volume Ratio Predict Stock Returns?

Cited by 34 publications

References 14 publications

Chasing Private Information

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Improving momentum strategies using residual returns and option‐implied information

Variance disparity and market frictions

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