Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?

Journal of Accounting Research, Forthcoming

48 Pages Posted: 10 Jan 2012

See all articles by Wen Jin

Wen Jin

Quantitative Management Associates

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Yuan Zhang

University of Texas at Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2012

Abstract

Recent evidence shows that option volatility skews and volatility spreads between call and put options predict equity returns. This study investigates whether such predictive ability is driven by option traders’ information advantage. We examine the predictive ability of volatility skews and volatility spreads around significant information events including earnings announcements, other firm-specific information events, and events that trigger significant market reactions. Consistent with option traders having an information advantage relative to equity traders before information events, we find that the option measures immediately before these events have higher predictive ability for short-term event returns than they do in a more dated window or before a randomly selected pseudo-event. We also find that option measures have predictive ability after information events. However, this predictive ability holds only for unscheduled corporate announcements, which suggests that, relative to equity traders, option traders have superior ability to process less anticipated information.

Keywords: Volatility Skew, Volatility Spread, Information Advantage

Suggested Citation

Jin, Wen and Livnat, Joshua and Zhang, Yuan, Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage? (January 9, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1982227

Wen Jin

Quantitative Management Associates ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Yuan Zhang (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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