Index Option Trading Activity and Market Returns

Management Science, Forthcoming

59 Pages Posted: 22 Jun 2016 Last revised: 20 Oct 2019

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Alexander Kurov

West Virginia University - College of Business & Economics

Dmitriy Muravyev

Michigan State University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: October 17, 2019

Abstract

Do order flows in index derivatives play an informational role? Weekly index put order flow on the International Securities Exchange positively and robustly predicts weekly S&P 500 index returns. This result obtains mainly for net put buying and is stronger in high VIX periods and in periods following macroeconomic announcements. We explore rationales for our findings, which include investor sentiment, the notion that market makers trade on information in options markets, and option-based risk protection strategies used by retail investors. The last explanation accords best with our analysis.

Keywords: index options, order flow, information, market efficiency

JEL Classification: G12, G14

Suggested Citation

Chordia, Tarun and Kurov, Alexander and Muravyev, Dmitriy and Subrahmanyam, Avanidhar, Index Option Trading Activity and Market Returns (October 17, 2019). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2798390 or http://dx.doi.org/10.2139/ssrn.2798390

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Alexander Kurov

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

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

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

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