Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases
Ihsan Badshah (),
Hardjo Koerniadi () and
James Kolari ()
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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
Journal of Risk and Financial Management, 2019, vol. 12, issue 4, 1-1
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)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:12:y:2019:i:4:p:179-:d:292380
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