Options Trading and Stock Price Crash Risk

43 Pages Posted: 9 May 2014 Last revised: 16 Sep 2014

See all articles by Mikhail Bhatia

Mikhail Bhatia

Hong Kong University of Science & Technology (HKUST), HKUST School of Business and Management, Department of Finance, Students

Viet Nga Cao

Monash Business School; Financial Research Network (FIRN)

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Cameron Truong

Monash University; Financial Research Network (FIRN)

Date Written: September 16, 2014

Abstract

Using a sample of U.S. firms between 1996 and 2011, this paper documents a positive association between options trading volume and future stock price crash risk. This relation is evidently more pronounced among firms with higher information asymmetry, business uncertainty, and short-sale constraints. In a dichotomous cross-sectional setting, we also document that firms with options trading have higher future crash risk than firms without options trading. We further show in a difference-in-difference analysis that firms experience an increase in crash risk immediately after the listing of options. The results suggest that options traders are able of identifying bad news hoarding by management and choose to trade in a liquid options market in anticipation of future crashes.

Keywords: crash risk, options trading

JEL Classification: G10, G11, G12, G14

Suggested Citation

Bhatia, Mikhail and Cao, Viet Nga and Chen, Yangyang and Truong, Cameron, Options Trading and Stock Price Crash Risk (September 16, 2014). Available at SSRN: https://ssrn.com/abstract=2434000 or http://dx.doi.org/10.2139/ssrn.2434000

Mikhail Bhatia

Hong Kong University of Science & Technology (HKUST), HKUST School of Business and Management, Department of Finance, Students ( email )

Clear Water Bay, Kowloon
Hong Kong

Viet Nga Cao

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: www.firn.org.au

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Cameron Truong (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
433
Abstract Views
2,627
rank
65,265
PlumX Metrics