Informed Trading Around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

Posted: 1 Aug 2001

See all articles by Narayanan Jayaraman

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Melissa B. Frye

University of Central Florida - College of Business Administration

Sanjiv Sabherwal

University of Texas at Arlington - Department of Finance and Real Estate

Abstract

This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery

Suggested Citation

Jayaraman, Narayanan and Frye, Melissa and Sabherwal, Sanjiv, Informed Trading Around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market. Available at SSRN: https://ssrn.com/abstract=274397

Narayanan Jayaraman (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

Melissa Frye

University of Central Florida - College of Business Administration ( email )

P.O. Box 161400
Department of Finance
Orlando, FL 32816
United States
407-823-3097 (Phone)

Sanjiv Sabherwal

University of Texas at Arlington - Department of Finance and Real Estate ( email )

Box 19449 UTA
Arlington, TX 76019
United States
817-272-3705 (Phone)
817-272-2252 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,742
PlumX Metrics