Options Trading Imbalance, Cash-Flow News, and Discount-Rate News
59 Pages Posted: 11 Apr 2024
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: Suggested Citation