Options Trading and Stock Price Informativeness

Abstract

We find that single-name options trading increases the absolute level of information content of prices (stock price informativeness). We show causality by examining the impact of Penny Pilot Program, which exogenously increases the options trading volume of some options. We rationalize our findings under the framework of Goldstein and Yang (2015) and show that informativeness increases through the channel of option and stock investors acquiring more information. The findings are driven by firms with higher information asymmetry and firms with more efficiently priced options. Options market introduction in a sample of 25 other economies also lead to higher price informativeness.

Keywords: option trading, price informativeness, stock synchronicity, information acquisition and production

JEL Classification: G02, G12, G13, G14