Excess Returns to Buying Low Options-Volume Stocks and Selling High Options-Volume Stocks: Information or Characteristics?
The Journal of Futures Markets, 2018
Posted: 14 Aug 2018
Date Written: July 16, 2018
This paper documents a negative relationship between options trading volume and stock returns. The relationship is remarkably robust and cannot be explained by existing asset-pricing theorems. We find that strategies that require buying stocks with low options trading volume in the past and selling stocks with high options trading volume in the past generate significant positive abnormal returns. Further analysis indicates that the pattern mostly represents a characteristic effect, in which options trading predicts stock returns through its relationship with determinant characteristics such as beta, illiquidity, and idiosyncratic volatility.
Keywords: options trading volume, prediction, market efficiency, characteristic
JEL Classification: G12
Suggested Citation: Suggested Citation