Informational Content of Trading Volume and Open Interest - an Empirical Study of Stock Option Market in India

Abstract

This study examines the role of certain non-price variables, namely open interest and trading volume, from the stock option market in determining the price of underlying shares in cash market. In order to examine the significance of these variables, I used the call and put option open interest and volume based predictors as given by Bhuyan and Yan (2002). The results show that these predictors have significant explanatory power with open interest being more significant as compared to trading volume. The study provides deterministic parameters that can be used by the uninformed investors to predict the price of underlying shares using stock options market data and formulate the profitable trading strategies based on it. Finally, it provides support to the view that presence of option market improves the price discovery in underlying asset market.

Keywords: Option market, options, price discovery, open interest

JEL Classification: G13, G14, D83.