Download or read book Predicting Volatility and the Information Content of Informed Traders in an Option Market written by Teng-Ching Huang and published by . This book was released on 2015 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the impact of information trading on predicting variation of implied volatility. First, we find that informed traders do trade in the index options market. The predicting biases of implied volatilities on the realized volatility are correlated with the information trading. Second, we find that delta market depth and bid-ask spread are correlated with the predicting variations in implied volatilities. Moreover, the difference between realized and implied volatility, bid-ask spread, and delta market depth are the determinants of price discovery in the option market. Third, the intraday patterns in realized volatility exhibit an inverse J-shape, which induces forecasting biases in implied volatilities. Finally, based on the performance of the volatility trading strategy, the result does not support efficient market hypothesis.

Download or read book An Empirical Examination of Informed Trading in the Option Market written by Thi Thanh Van Le and published by . This book was released on 2012 with total page 376 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite a growing research interest in option trading and its impact on the pricing of the underlying asset, the role of options as a vehicle for informed trading remains an important economic question which has not yet been fully explored. In fact, even though academics have often argued that informed traders may prefer to trade in the option market rather than the equity market1, the question of whether (and to what extent) such a proposition would hold in practice has not been systematically addressed in the literature. This overarching research problem forms the foundation of this doctoral research project, leading to two important research questions. First, if investors do in fact use options to trade on information about underlying stock prices in practice, what implications does this have for the option (stock) pricing and forecasting? Second, what are the key factors driving traders' decisions to trade on new information in one market over another? These two issues correspond to the two gaps found in the extant literature on option trading, and also in the strand of empirical studies focusing on the role of options as a mechanism for trading on information about the underlying asset. To explore these research questions, three interrelated projects have been undertaken, each with a unique contribution to informing the research topic. These closely related investigations jointly provide consolidated answers to the two research questions raised previously. In response to the first research question, we pursue two strands of empirical investigation to examine the presence of informed trading in the option market. Firstly, we investigate the extent to which the information content extracted from options trading can be used to enhance predictions of the future volatility realised by underlying stocks. Secondly, we examine the price impact of information trading activities within the option market, focusing especially on the way in which the level of trading activities can explain and predict the future dynamics of the option implied volatility smile. Both of these strands yield evidence in support of information trading activities existing in the option market. Regarding the second research question, our collective evidence indicates that the allocation of informed traders between option and stock markets depends on the trade-off of transaction costs and trading opportunities existing in two related markets. This finding has consistently been corroborated by separate evidence emerging from our independent investigations. We found that the degree of information trading in the option market varies across different stocks, corresponding to variations in the level of individual stock liquidity. It has also been found that the degree of information asymmetry of option trades changed in response to changes in trading costs driven by regulatory changes observed during the 2008 short-sale ban. This research makes a valuable contribution to the field of option research. From the theoretical perspective, it addresses significant gaps in the existing literature and extends our understanding of informed trading activities in the option market. In particular, it contributes to the body of knowledge on the economic value of derivatives by investigating the critical role they have played in the process of incorporating new information into the market. From the practical perspective, it proposes a simple-yet-effective technique which employs trading volume to improve forecasts of the underlying stock volatility and of the option implied volatility (price) respectively. Since volatility plays such a central role in the practice of derivatives trading, risk analysis and portfolio management, better forecasts of these quantities are clearly important and highly regarded by practitioners. 1 Mainly due to higher financial leverages, reduced transactions costs and wider trading opportunities (eg speculation on volatility) (Black, 1975).

Download or read book Informed Trading in Options Markets and Its Information Value written by Justin Vitanza and published by . This book was released on 2015 with total page 83 pages. Available in PDF, EPUB and Kindle. Book excerpt: "In this paper, I present evidence that informed traders represent a large enough portion of option market activity to impact market prices. By entering the market on the long side before positive or negative events, they drive up both open interest and ask prices, while bid prices remain relatively stable. Seeing this pattern is indicative of either positive (when found in calls) or negative (for puts) future news announcements. When conditioning on these announcements, we also see that this pattern predicts return reactions. In particular, information embedded in option prices is useful in predicting earnings surprises and reactions to mergers. My primary measure of option information content is the change in the difference between implied volatility and realized daily volatility measured over the previous month. With hindsight, this difference rises prior to positive announcements for call options, while it rises prior to negative announcements for put options. This differential behavior provides strong evidence that these assets are not redundant in practice, as is often implied by option pricing models. Further, this information constitutes a primary risk factor in equity markets, as positive announcement risk is positively related to future returns due to the procyclicality of these announcements. Efficiently utilizing this information suggests a long-short trading strategy that yields over 1.2 percent per month. This strategy also completely explains the call-put volatility spread anomaly and is robust to controls for aggregate volatility sensitivity and known metrics that purport to monitor informed trading"--Page v.

Download or read book The Information Content of Options written by Yonatan Navon and published by . This book was released on 2014 with total page 382 pages. Available in PDF, EPUB and Kindle. Book excerpt: The objective of this thesis is to examine the information content of stock options in financial markets. A key question in financial economics is how information diffuses across markets and how quickly it is reflected in security prices. This thesis aims at exploring this question by investigating the informational role that options play in financial markets. This is achieved by exploring the joint cross section of option and bond prices, the informational role of options in seasoned equity offerings (SEOs), and the information content of options trading prior to announcements of changes to the S&P 500 Index.The thesis comprises three essays, each exploring the information content of equity options trading from a different angle. The first essay examines the joint cross section of option implied volatility and corporate bond returns. Theoretical and empirical work in finance suggests that stocks and bonds of the same issuing firm should share common risk factors. Therefore, new information about a firm should affect both its stock and bond prices. However, if one market offers trading incentives over other markets, informed traders and traders with better ability to process information may choose to trade in that market over the others. As a result, markets that provide advantages to informed traders will incorporate information prior to other markets. The empirical analysis in this chapter reveals that options trading is strongly predictive of corporate bond returns. A strategy of buying (selling) the portfolio with the lowest (highest) changes in option implied volatility yields an average monthly excess bond return of 1.03%. This strategy is statistically highly significant and economically very meaningful and indicates that information is incorporated into option prices prior to bond prices. In contrast, I find no evidence that bond prices incorporate information prior to option or stock prices. Since bond investors are generally sophisticated institutional investors who process information efficiently and the predictive ability of options is persistent, I conclude that informed trading rather than superior information processing abilities is responsible for the predictive ability of options.The second essay explores the information content of option implied volatility around the announcements and issue dates of SEOs. The literature on SEOs indicates that announcements and issue dates contain important information about firms and therefore provide profitable opportunities for traders with private information. While prior research has focused on the information content of short sales around SEOs, this study focuses on the information content of options which can act as an alternative for short selling. The empirical analysis provides evidence of informed trading in the options market around SEO announcements. Around SEO issue dates, I find that higher demand for put options is significantly related to larger issue discounts which is consistent with the manipulative trading hypothesis. The results in this study indicate that regulators should consider extending the short-sale restrictions of Rule 105 to restrict trading in related securities.Finally, the third essay investigates the information content of options prior to the S&P 500 Index inclusion and exclusion announcements. These announcements are unique events since they are not announced by the firm and, as stated by S&P, they should convey no new information. In addition, the large abnormal returns observed following these announcements make them distinctive ground for testing the informational role of options. Consistent with the notion that informed traders operate in the options market, the empirical results in this essay indicate that there is a significant relationship between options trading preceding index inclusion announcements and abnormal returns following these announcements. In contrast, I find no evidence for a relationship between options trading and abnormal returns following exclusion announcements.

Download or read book Information Trading Volatility and Liquidity in Option Markets written by Joseph A. Cherian and published by . This book was released on 1997 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Volatility Information Trading in the Option Market written by Sophie Xiaoyan Ni and published by . This book was released on 2009 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates informed trading on stock volatility in the option market. Using a unique data set from the Chicago Board Options Exchange, we construct non-market maker net demand for stock volatility from the trading volume of individual equity options. We find that this volatility demand is informative about the future realized volatility of underlying stocks which suggests the presence of volatility information traders in the option market. We also examine asset pricing implications of volatility information trading by measuring Kyle's lambda: The impact on option prices for each unit increase in volatility demand. The price impact is positive which is consistent with the existence of informational asymmetry about stock volatility. More importantly, we link the time variation in the price impact to the time variation in the degree of informational asymmetry. In particular, the price impact increases by over 50 percent as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.

Download or read book Information Content of Options Trading Volume for Future Volatility written by Chuang-Chang Chang and published by . This book was released on 2012 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study follows the approach of Ni, Pan and Poteshman (2008) ndash; based upon the vega-weighted net demand for volatility ndash; to determine whether volatility information exists within the Taiwan options market. Our empirical results show that foreign institutional investors possess the strongest and most direct volatility information, which is realized by the delta-neutral options/futures trades. In addition, a few individual investors (less than 1% of individuals' trades) might be informed and realize their volatility information using the strangle strategy. Surprisingly, we find no evidence to support the predictive ability of the volatility demand from straddle trades, despite the widespread acknowledgement that such trades are sensitive to volatility.

Download or read book Implied Volatility Functions written by Bernard Dumas and published by . This book was released on 1996 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.

Download or read book Information Trading and Product Market Interactions written by Heather Elise Tookes and published by . This book was released on 2003 with total page 592 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Have Financial Markets Become More Informative written by Jennie Bai and published by . This book was released on 2012-12-01 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: The finance industry has grown, financial markets have become more liquid, and information technology allows arbitrageurs to trade faster than ever. But have market prices then become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not improved since 1960. We use a model with information acquisition and investment to link financial development, price informativeness, and allocational efficiency. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and welfare. We find that this component has remained stable over the past 50 years. When we decompose price informativeness into real price efficiency and forecasting price efficiency, we find that both have remained stable.

Download or read book Hedge Fund Activism written by Alon Brav and published by Now Publishers Inc. This book was released on 2010 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hedge Fund Activism begins with a brief outline of the research literature and describes datasets on hedge fund activism.

Download or read book Volatility and Correlation written by Riccardo Rebonato and published by John Wiley & Sons. This book was released on 2005-07-08 with total page 864 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Volatility and Correlation 2nd edition: The Perfect Hedger and the Fox, Rebonato looks at derivatives pricing from the angle of volatility and correlation. With both practical and theoretical applications, this is a thorough update of the highly successful Volatility & Correlation – with over 80% new or fully reworked material and is a must have both for practitioners and for students. The new and updated material includes a critical examination of the ‘perfect-replication’ approach to derivatives pricing, with special attention given to exotic options; a thorough analysis of the role of quadratic variation in derivatives pricing and hedging; a discussion of the informational efficiency of markets in commonly-used calibration and hedging practices. Treatment of new models including Variance Gamma, displaced diffusion, stochastic volatility for interest-rate smiles and equity/FX options. The book is split into four parts. Part I deals with a Black world without smiles, sets out the author’s ‘philosophical’ approach and covers deterministic volatility. Part II looks at smiles in equity and FX worlds. It begins with a review of relevant empirical information about smiles, and provides coverage of local-stochastic-volatility, general-stochastic-volatility, jump-diffusion and Variance-Gamma processes. Part II concludes with an important chapter that discusses if and to what extent one can dispense with an explicit specification of a model, and can directly prescribe the dynamics of the smile surface. Part III focusses on interest rates when the volatility is deterministic. Part IV extends this setting in order to account for smiles in a financially motivated and computationally tractable manner. In this final part the author deals with CEV processes, with diffusive stochastic volatility and with Markov-chain processes. Praise for the First Edition: “In this book, Dr Rebonato brings his penetrating eye to bear on option pricing and hedging.... The book is a must-read for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.” —Professor Ian Cooper, London Business School “Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion...A rare combination of intellectual insight and practical common sense.” —Anthony Neuberger, London Business School

Download or read book Option Trading written by Euan Sinclair and published by John Wiley & Sons. This book was released on 2010-07-16 with total page 326 pages. Available in PDF, EPUB and Kindle. Book excerpt: An A to Z options trading guide for the new millennium and the new economy Written by professional trader and quantitative analyst Euan Sinclair, Option Trading is a comprehensive guide to this discipline covering everything from historical background, contract types, and market structure to volatility measurement, forecasting, and hedging techniques. This comprehensive guide presents the detail and practical information that professional option traders need, whether they're using options to hedge, manage money, arbitrage, or engage in structured finance deals. It contains information essential to anyone in this field, including option pricing and price forecasting, the Greeks, implied volatility, volatility measurement and forecasting, and specific option strategies. Explains how to break down a typical position, and repair positions Other titles by Sinclair: Volatility Trading Addresses the various concerns of the professional options trader Option trading will continue to be an important part of the financial landscape. This book will show you how to make the most of these profitable products, no matter what the market does.

Download or read book Trading and Exchanges written by Larry Harris and published by OUP USA. This book was released on 2003 with total page 664 pages. Available in PDF, EPUB and Kindle. Book excerpt: Focusing on market microstructure, Harris (chief economist, U.S. Securities and Exchange Commission) introduces the practices and regulations governing stock trading markets. Writing to be understandable to the lay reader, he examines the structure of trading, puts forward an economic theory of trading, discusses speculative trading strategies, explores liquidity and volatility, and considers the evaluation of trader performance. Annotation (c)2003 Book News, Inc., Portland, OR (booknews.com).

Download or read book Options for Volatile Markets written by Richard Lehman and published by John Wiley & Sons. This book was released on 2011-07-15 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: Practical option strategies for the new post-crisis financialmarket Traditional buy-and-hold investing has been seriously challengedin the wake of the recent financial crisis. With economic andmarket uncertainty at a very high level, options are still the mosteffective tool available for managing volatility and downside risk,yet they remain widely underutilized by individuals and investmentmanagers. In Options for Volatile Markets, Richard Lehmanand Lawrence McMillan provide you with specific strategies to lowerportfolio volatility, bulletproof your portfolio against anycatastrophe, and tailor your investments to the precise level ofrisk you are comfortable with. While the core strategy of this new edition remains covered callwriting, the authors expand into more comprehensive optionstrategies that offer deeper downside protection or even allowinvestors to capitalize on market or individual stock volatility.In addition, they discuss new offerings like weekly expirations andoptions on ETFs. For investors who are looking to capitalize onglobal investment opportunities but are fearful of lurking "blackswans", this book shows how ETFs and options can be utilized toconstruct portfolios that are continuously protected againstunforeseen calamities. A complete guide to the increased control and lowered riskcovered call writing offers active investors and traders Addresses the changing investment environment and how to useoptions to succeed within it Explains how to use options with exchange-traded funds Understanding options is now more important than ever, and withOptions for Volatile Markets as your guide, you'll quicklylearn how to use them to protect your portfolio as well as improveits overall performance.

Download or read book Trades Quotes and Prices written by Jean-Philippe Bouchaud and published by Cambridge University Press. This book was released on 2018-03-22 with total page 464 pages. Available in PDF, EPUB and Kindle. Book excerpt: The widespread availability of high-quality, high-frequency data has revolutionised the study of financial markets. By describing not only asset prices, but also market participants' actions and interactions, this wealth of information offers a new window into the inner workings of the financial ecosystem. In this original text, the authors discuss empirical facts of financial markets and introduce a wide range of models, from the micro-scale mechanics of individual order arrivals to the emergent, macro-scale issues of market stability. Throughout this journey, data is king. All discussions are firmly rooted in the empirical behaviour of real stocks, and all models are calibrated and evaluated using recent data from Nasdaq. By confronting theory with empirical facts, this book for practitioners, researchers and advanced students provides a fresh, new, and often surprising perspective on topics as diverse as optimal trading, price impact, the fragile nature of liquidity, and even the reasons why people trade at all.

Download or read book High Frequency Trading and Limit Order Book Dynamics written by Ingmar Nolte and published by Routledge. This book was released on 2016-04-14 with total page 377 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book brings together the latest research in the areas of market microstructure and high-frequency finance along with new econometric methods to address critical practical issues in these areas of research. Thirteen chapters, each of which makes a valuable and significant contribution to the existing literature have been brought together, spanning a wide range of topics including information asymmetry and the information content in limit order books, high-frequency return distribution models, multivariate volatility forecasting, analysis of individual trading behaviour, the analysis of liquidity, price discovery across markets, market microstructure models and the information content of order flow. These issues are central both to the rapidly expanding practice of high frequency trading in financial markets and to the further development of the academic literature in this area. The volume will therefore be of immediate interest to practitioners and academics. This book was originally published as a special issue of European Journal of Finance.