Index Option Trading Activity and Market Returns
Management Science, Forthcoming
59 Pages Posted: 22 Jun 2016 Last revised: 20 Oct 2019
Date Written: October 17, 2019
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: Suggested Citation