Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases

Ihsan Badshah (), Hardjo Koerniadi and James Kolari
Additional contact information
Hardjo Koerniadi: Department of Finance, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand
James Kolari: Department of Finance, Texas A&M University, College Station, TX 77843-4218, USA

JRFM, 2019, vol. 12, issue 4, 1-11

Abstract: The informed options trading hypothesis posits that option prices lead stock prices. In this paper, we extended the research on this hypothesis to open-market share repurchases. Empirical tests showed that the implied volatility spread was not significantly related to buy-and-hold abnormal stock returns. However, further evidence reveal a significant relationship between implied volatility spread and subsequent stock return volatility around open-market share repurchase events. We concluded that option traders have private information on the volatility of stock returns and superior information processing ability that accounts for prescient pricing behavior in options relative to stocks.

Keywords: event study; informed trading; options; share repurchase; volatility spread; US equity market (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/1911-8074/12/4/179/pdf (application/pdf)
https://www.mdpi.com/1911-8074/12/4/179/ (text/html)

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:gam:jjrfmx:v:12:y:2019:i:4:p:179-:d:292380

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().