On the Informational Role of US Equity Options
Item
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Title
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On the Informational Role of US Equity Options
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Identifier
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d_2009_2013:205d16c92ec0:11790
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identifier
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12411
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Creator
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Hu, Jianfeng,
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Contributor
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Liuren Wu
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Date
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2013
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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 | greeks | information | options | PIN | price discovery
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Abstract
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This dissertation consists of three parts of related research on the information flow across the stock market and the options market. In the first part, I investigate the optimal method of aggregating stock price and volatility information in option transactions across different option strike prices and maturities. I propose weighting methods based on option risk exposures ( Greeks) and find that these aggregation methods empirically outperform the traditional methods for the NASDAQ 100 tracking stock (QQQQ). In the second part, I focus on the stock price information from option trading in the stock cross section. I decompose total stock order imbalance into an option market induced component and a stock market induced component independent of options market activity. I find that the option order imbalance has significant predictive ability in the cross section but the independent stock order imbalance has only transitory price impact. The return predictability of option order imbalance is greater for firms with higher levels of information asymmetry, larger transaction costs, and when option trading is active. I also find that the return predictability mainly comes from negative option order imbalance and the imbalance also predicts cumulative abnormal returns five days before earnings announcements. In the third part, I examine the impact of option listing on the underlying stock market quality. I find empirical evidence that option introduction reduces the probability of informed trading by attracting liquidity based traders more than information based traders. The robust findings of significant amount of information content in the options market reject the notion of options as redundant assets and raise more questions on how derivative securities should be priced and regulated.
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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
