Does Option Trading Affect the Return Predictability of Short Selling Activity?

39 Pages Posted: 9 May 2014 Last revised: 1 Dec 2016

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Hung Wan Kot

University of Macau - Department of Finance and Business Economics

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Date Written: Nov 30, 2016

Abstract

We analyze the effect of option trading on the return predictability of short interest. There is no difference in the return predictability of short-interest ratios between stocks with and without traded options. The predictability of the put-call open interest ratio (PCOIR) is weaker than that of the short-interest ratio (SIR), which does not change after controlling for the PCOIR. While the predictability of the SIR lasts twelve months, the predictability of the PCOIR disappears after the first month. Both the expected and unexpected components of the SIR can predict stock returns, which suggests that the return predictability of short interest is related to both short-sale constraints and information discovery. In contrast, only the unexpected component of PCOIR, not the expected component, can predict stock returns.

Keywords: Short Sale Constraints, Behavioral, Market Efficiency, Options

JEL Classification: G12, G13

Suggested Citation

Chan, Kalok and Kot, Hung Wan and Ni, Sophie Xiaoyan, Does Option Trading Affect the Return Predictability of Short Selling Activity? (Nov 30, 2016). Available at SSRN: https://ssrn.com/abstract=2434387 or http://dx.doi.org/10.2139/ssrn.2434387

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Hung Wan Kot

University of Macau - Department of Finance and Business Economics ( email )

Macau

Sophie Xiaoyan Ni (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

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