Do Investors Use Options and Futures to Trade on Different Types of Information? Evidence from an Aggregate Stock Index

Journal of Futures Markets

53 Pages Posted: 21 Apr 2016 Last revised: 29 Aug 2017

See all articles by Kyoung-hun Bae

Kyoung-hun Bae

Ulsan National Institute of Science and Technology

Peter Dixon

U.S. Securities and Exchange Commission

Date Written: May 22, 2017

Abstract

Option prices are sensitive to changes in volatility whereas futures prices are not. We investigate this distinction empirically and test the hypothesis that investors with information about future returns (volatilities) will prefer to trade in futures (options) because futures (options) protect the investor from the risk that their bet will go against them due to unforeseen changes in volatility (returns). Consistent with this hypothesis we find that order imbalances between institutional and retail investors in Korean KOSPI 200 index futures (options) robustly predict short term returns (volatilities) on the KOSPI 200 index whereas options (futures) imbalances do not.

Keywords: Options, Futures, Institutional Investors, Retail Investors, Aggregate Stock Returns, Volatility, Information

Suggested Citation

Bae, Kyoung-hun and Dixon, Peter, Do Investors Use Options and Futures to Trade on Different Types of Information? Evidence from an Aggregate Stock Index (May 22, 2017). Journal of Futures Markets, Available at SSRN: https://ssrn.com/abstract=2767207 or http://dx.doi.org/10.2139/ssrn.2767207

Kyoung-hun Bae

Ulsan National Institute of Science and Technology ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

Peter Dixon (Contact Author)

U.S. Securities and Exchange Commission ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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