Information content of order imbalance in the index options market

Ahmet Sensoy and John Omole

International Review of Economics & Finance, 2022, vol. 78, issue C, 418-432

Abstract: We use proprietary transaction level data of Borsa Istanbul to compute the order imbalance of index options in order to investigate the linkages between option trades and spot index returns. Our findings show that weeks with higher call (put) order imbalance are associated with higher (lower) contemporaneous spot index returns. In addition, higher call order imbalance significantly predicts negative next-week index returns. The spot index return predictability by call options is absorbed neither by the stock order imbalance nor the index futures imbalance. Indeed, this predictability is consistent with the view that the hedging demand of counterparties in the option market that leads to the transfer of order imbalance from option market to stock market is the driver of predictability. Results are robust after controlling for various factors.

Keywords: Derivatives; Index options; Order imbalance; Informed trading; Delta hedging; Borsa Istanbul (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:78:y:2022:i:c:p:418-432

DOI: 10.1016/j.iref.2021.11.006

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