Option Volume and Stock Prices: Evidence on Where Informed Traders Trade
Cornell University - Department of Economics
Cornell University - Samuel Curtis Johnson Graduate School of Management
P. S. Srinivas
Journal of Finance, Vol. 53, No. 2, April 1998
This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets. We show conditions under which informed traders trade options, and we investigate the implications of this for the linkage between markets. Our model predicts an important informational role for the volume of particular types of option trades. We empirically test our model's hypotheses with intra-day option data. Our main empirical result is that negative and positive option volumes contain information about future stock prices.
JEL Classification: G13, G14Accepted Paper Series
Date posted: July 2, 1998
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