The option to stock volume ratio and future returns

Travis L. Johnson and Eric C. So

Journal of Financial Economics, 2012, vol. 106, issue 2, 262-286

Abstract: We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket asymmetric information model, equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 0.34% per week (19.3% annualized). Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information.

Keywords: Short-sale costs; Options; Trading volume; Return predictability (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (121)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:262-286

DOI: 10.1016/j.jfineco.2012.05.008

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