The Option to Stock Volume Ratio and Future Returns
61 Pages Posted: 25 Jul 2010 Last revised: 7 Jun 2013
Date Written: April 31, 2011
Abstract
We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information.
Keywords: Options, Volume, Microstructure, Short Sale Costs
JEL Classification: G14, G11, G12
Suggested Citation: Suggested Citation
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