The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements

JOURNAL OF FINANCE, Vol. 50 No. 5, December 1995

Posted: 22 Aug 1998

See all articles by Stewart Mayhew

Stewart Mayhew

Cornerstone Research

Atulya Sarin

Santa Clara University - Department of Finance

Kuldeep Shastri

University of Pittsburgh - Finance Group

Abstract

We examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, options spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.

JEL Classification: G14

Suggested Citation

Mayhew, Stewart and Sarin, Atulya and Shastri, Kuldeep, The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements. JOURNAL OF FINANCE, Vol. 50 No. 5, December 1995, Available at SSRN: https://ssrn.com/abstract=6863

Stewart Mayhew

Cornerstone Research ( email )

1919 Pennsylvania Avenue NW
Suite 600
Washington, DC 20006-3420
United States

Atulya Sarin

Santa Clara University - Department of Finance ( email )

Leavey School of Business and Administration
Santa Clara, CA 95053
United States
408-554-4953 (Phone)
408-904-4498 (Fax)

HOME PAGE: http://business.scu.edu/asarin

Kuldeep Shastri (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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