Essays on the information flow from option markets to stock markets
Item
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Title
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Essays on the information flow from option markets to stock markets
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Identifier
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d_2009_2013:73648148be52:10535
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identifier
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10751
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Creator
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Atilgan, Yigit,
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Contributor
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Turan G. Bali | K. Ozgur Demirtas
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Date
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2010
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Language
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English
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Publisher
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City University of New York.
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Subject
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Finance | earnings announcements | information flow | options | skewness | stock return predictability | volatility spreads
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Abstract
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Informed traders might prefer the option markets over stock markets due to advantages offered by option trading such as reduced transaction costs, enhanced opportunities for taking short positions and higher leverage. The first chapter of this dissertation provides a brief review of the empirical and theoretical literatures related to this question.;The second chapter investigates the intertemporal relation between volatility spreads and expected market returns. If informed traders who prefer to trade in the option markets demand more put (call) options before negative (positive) price movements due to their private information, then one would expect to see a significantly negative intertemporal relation between put minus call implied volatility spreads and aggregate returns. The results indicate that volatility spreads are significantly and negatively related to expected market returns after controlling for conditional variance and macroeconomic variables that proxy for the changes in future investment opportunities. Since the volatility spreads may also proxy for skewness, direct physical and risk-neutral skewness measures are constructed and the results indicate that there is no significant relation between various measures of skewness and expected market returns. The predictive ability of volatility spreads is stronger when consumer sentiment index is unusually high or low.;The third chapter brings a more thorough look into the predictive ability of deviations from put-call parity on stock returns. If the trading activity of informed investors is an important driver of deviations from put-call parity, then the predictability of stock returns should be more pronounced during major information events such as earnings announcements. These deviations are measured by the implied volatility spreads between pairs of matched put and call options. During a two-day earnings announcement window, the abnormal returns to a portfolio that buys stocks with relatively expensive call options is about 2 percent greater than the abnormal returns to a portfolio that buys stocks with relatively expensive put options. The informational role of option markets is further supported by the findings that the degree of announcement return predictability is stronger when deviations from put-call parity are measured using more liquid options, information environment is more asymmetric and stock liquidity is low.
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Type
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dissertation
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Source
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2009_2013.csv
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degree
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Ph.D.
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Program
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Business
