Option trading and the cross‐listed stock returns: Evidence from Chinese A–H shares

Xingguo Luo, Xiaoli Yu, Shihua Qin and Qi Xu

Journal of Futures Markets, 2020, vol. 40, issue 11, 1665-1690

Abstract: We empirically investigate the effects of option trading on the cross‐listed stock returns. Using dual‐listed stocks in mainland China (A) and Hong Kong (H) stock exchanges, we show that option order imbalance (OI) positively and significantly predicts daily stock returns for both markets, controlling for risk factors and firm characteristics. Informed trading rather than price pressure better explain the predictability. High OI stocks have higher trading volume and present lottery‐like properties. Three important events significantly affect the predictive power of OI, consistent with the improved market quality and the episode of speculative trading. Robustness checks support the main findings.

Date: 2020
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