Informed Trading in the Stock Market and Option Price Discovery

66 Pages Posted: 19 Oct 2015 Last revised: 4 Mar 2020

See all articles by Pierre Collin-Dufresne

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Vyacheslav Fos

Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Dmitriy Muravyev

Michigan State University - Department of Finance

Date Written: November 1, 2017

Abstract

When activist shareholders file Schedule 13D filings, the average excess return on target stocks is 6% and stock price volatility drops by about 10%. Prior to filing days, volatility (price) information is reflected in option (stock) prices. Using a comprehensive sample of trades by Schedule 13D filers which reveals on what days and in what markets they trade prior to filing Schedule 13D, we show that on days when activists accumulate shares, option implied volatility decreases, volatility skew increases, and option bid-ask spreads widen. The adverse selection risk in options is driven by the volatility component of private information and is higher when stock and option markets are highly integrated. The evidence is consistent with informed trading in the stock market contributing to the flow of volatility information into option prices.

Suggested Citation

Collin-Dufresne, Pierre and Fos, Vyacheslav and Muravyev, Dmitriy, Informed Trading in the Stock Market and Option Price Discovery (November 1, 2017). Swiss Finance Institute Research Paper No. 15-55, Available at SSRN: https://ssrn.com/abstract=2675866 or http://dx.doi.org/10.2139/ssrn.2675866

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
661
Abstract Views
3,109
rank
43,784
PlumX Metrics