The Impact of Trader Behavior on Options Price Volatility

Ping-Hung Chou, Pei-Shan Wu and Teng-Tsai Tu

Asian Economic and Financial Review, 2014, vol. 4, issue 4, 503-516

Abstract: Because relatively few studies have examined the behavior among different types of traders in the options market, this investigation conducts an empirical study examining the impact of trader type on price volatility in the TXO market. It has been more than 10 years since the TXO market started in 2001. Compared with mature foreign options markets, the TXO market is considered as an emerging market and most transactions in the market are speculative in nature. This study investigates whether informed investors choose to trade options because of their higher leverage, which makes them attractive to speculators seeking to benefit from variations in the underlying price. This study also examines whether institutional investors are better informed than individual investors. In addition, this study attempts to illuminate the role played by market makers, whether as traditional specialists to provide liquidity and thus stabilize the price, or as opportunistic traders. Furthermore, this study aims to discover the relationship between trading duration and options price volatility, to clarify whether liquidity-based trading or informed-based trading dominates the TXO market. The empirical results suggest that institutional investors are better informed than individual investors. Meanwhile, market makers are liquidity providers in the put market, but liquidity demanders in the OTM and ATM call markets. Furthermore, the results verify that liquidity-based trading dominates the OTM call and put markets.

Keywords: Trader behavior; Trade duration; Informed trading; Liquidity trading; Options volatility; TXO market (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
https://archive.aessweb.com/index.php/5002/article/view/1174/1708 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:asi:aeafrj:v:4:y:2014:i:4:p:503-516:id:1174

Access Statistics for this article

More articles in Asian Economic and Financial Review from Asian Economic and Social Society
Bibliographic data for series maintained by Robert Allen ().