Do Option Open-Interest Changes Foreshadow Future Equity Returns?
University of West Florida
James S. Doran
Florida State University - Department of Finance
July 12, 2011
Financial Markets and Portfolio Management, Vol. 25, No. 3, pp. 265-280, 2011
Recent work considers whether information is simultaneously reflected in both option and equity markets. We provide new evidence supporting Black’s (Financ. Anal. J. 31:36–72, 1975) conjecture that information is first revealed in option markets. Specifically, changes in call and put open-interest levels have predictive power for future equity returns. Large increases in call open interest are followed by significantly increased equity returns. Put open-interest increases precede weaker future returns, but the relationship is considerably less pronounced in the presence of certain controls. The recent change in the call-to-put open-interest ratio has predictive power as to equity returns over the following week, even after controlling for numerous factors.
Keywords: options, open interest, market efficiency, investor sentiment
JEL Classification: G11, G12, G14Accepted Paper Series
Date posted: August 29, 2011
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