Information flow between the stock and option markets: Where do informed traders trade?

Review of Financial Economics - Tập 14 - Trang 1-23 - 2005
Carl R. Chen1, Peter P. Lung1, Nicholas S.P. Tay1
1School of Business Administration, Department of Economics and Finance, University of Dayton, Dayton, OH 45469-2251, USA

Tóm tắt

AbstractThis paper investigates the flow of information between the equity and options markets. We argue that informed traders, in deciding where to place their trades, are not entirely indifferent to option moneyness, degree of information asymmetry, and option liquidity. Unlike some previous studies that find information to flow unilaterally from equity to options markets, we control for the above factors and discover feedback relations between trades in out‐of‐the‐money (OTM) options and the underlying equities. The finding is consistent with the pooling equilibrium hypothesis, which asserts that informed traders trade in both the equity and options markets. Some informed traders are probably attracted to the out‐of‐the money options because of their higher liquidity, lower premiums, and higher delta‐to‐premium ratios, hence, lending support to the liquidity and leverage hypothesis.

Tài liệu tham khảo

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Review of Financial Economics

Tập 14

1-23

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