When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests

Scott Fung and Robert Loveland

Journal of Futures Markets, 2020, vol. 40, issue 10, 1459-1485

Abstract: Using Federal Reserve bank stress test announcements, we examine when option traders acquire informational advantage and when they exploit it. We find consistent evidence of informed options trading around announcements. However, when test results are announced in successive weeks we find high abnormal option volume, considerably positive abnormal returns and significant return predictability in the first week, but not the following week. This suggests that informed option traders are able to anticipate upcoming news events and skillfully process public information but it also suggests that trading on acquired information is conditioned on the level of information asymmetry in the market.

Date: 2020
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https://doi.org/10.1002/fut.22149

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