Differences of Opinion of Public Information and Speculative Trading in Stocks and Options

46 Pages Posted: 3 Feb 2005

See all articles by H. Henry Cao

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

Hui Ou-Yang

Cheung Kong Graduate School of Business

Date Written: December 15, 2003

Abstract

This paper develops a model of trading in stocks and options based on differences of opinion of public information among risk-averse investors. It shows that both additional trading sessions and the introduction of options enhance investors' perceived welfare and that in the presence of options, the trading volume of the underlying stock is positive even if the stock price remains unchanged. Some unique empirical implications are that the trading volume of options increases with both the arrival of public information and the dispersion of investors' interpretation of it, and that the introduction of options makes the trading volume of the underlying stock both higher and more sensitive to the price changes of the underlying stock.

Keywords: High Confidence, Low Confidence, Differential Interpretation of Public Information

Suggested Citation

Cao, Huining Henry and Ou-Yang, Hui, Differences of Opinion of Public Information and Speculative Trading in Stocks and Options (December 15, 2003). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=644006 or http://dx.doi.org/10.2139/ssrn.644006

Huining Henry Cao (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Hui Ou-Yang

Cheung Kong Graduate School of Business ( email )

Hong Kong
China
852-5199-6227 (Phone)

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