Options Trading Imbalance, Cash-Flow News, and Discount-Rate News

59 Pages Posted: 11 Apr 2024

See all articles by Doina Chichernea

Doina Chichernea

University of Denver - Reiman School of Finance

Kershen Huang

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship

Alex Petkevich

University of Denver

Pavel Teterin

University of Toledo

Date Written: March 13, 2024

Abstract

Using publicly available information on option volume totals, we develop new measures of directional option-to-stock (O/S) trading volume imbalance. The novel measures are strongly related to the cash-flow (CF) and discount-rate (DR) news components of unexpected stock returns and consistently predict future abnormal performance. While options markets respond more strongly to CF news than do equity markets, they still do not fully incorporate CF news into prices and therefore lead to returns predictability. This underreaction phenomenon is of smaller magnitude when the options market response is stronger and when short-sale constraints are less binding.

Keywords: option volume, cash-flow news, underreaction, market efficiency

JEL Classification: G11, G12, G14

Suggested Citation

Chichernea, Doina and Huang, Kershen and Petkevich, Alex and Teterin, Pavel, Options Trading Imbalance, Cash-Flow News, and Discount-Rate News (March 13, 2024). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4757896

Doina Chichernea

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO 80208
United States

Kershen Huang (Contact Author)

Nova Southeastern University - H. Wayne Huizenga School of Business & Entrepreneurship ( email )

3300 S. University Drive
Fort Lauderdale, FL 33328-2004
United States

HOME PAGE: http://bit.ly/kershenhuang

Alex Petkevich

University of Denver ( email )

2101 S. University Blvd.
Denver, CO 80208-8921
United States

HOME PAGE: http://https://sites.google.com/view/alexpetkevich/home

Pavel Teterin

University of Toledo ( email )

2801 W. Bancroft St.
Mail Stop 103
Toledo, OH 43606
United States

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