EconPapers    
Economics at your fingertips  
 

THE INFORMATION CONTENT OF OPTION TRADING AND LIQUIDITY RISK

Shih-Ping Feng

The International Journal of Business and Finance Research, 2021, vol. 15, issue 1, 89-98

Abstract: This paper presents strong evidence to show that stock liquidity and option liquidity play important roles in explaining the information content of options trading for future stock returns. Using implied volatility skew to capture the option trading activity of informed traders, we provide a clear and negatively predictive linkage between option trading and stock returns. The negatively predictive relation between options trading activity and stock returns is particularly accentuated for stocks with lower liquidity. This shows that lower levels of stock liquidity increase the amount of informed trading activity in the option market, and stock is slow to incorporate information embedded in option trading activities. In addition, the predictive ability of option trading activity tends to increase with option liquidity, for each level of stock liquidity. The empirical results are sufficiently robust for different liquidity measures.

Keywords: Stock Liquidity; Option Liquidity; Information Content; Option Trading (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v15n1-2021/IJBFR-V15N1-2021-7.pdf (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:ibf:ijbfre:v:15:y:2021:i:1:p:89-98

Access Statistics for this article

The International Journal of Business and Finance Research is currently edited by Terrance Jalbert

More articles in The International Journal of Business and Finance Research from The Institute for Business and Finance Research
Bibliographic data for series maintained by Mercedes Jalbert ().

 
Page updated 2021-11-27
Handle: RePEc:ibf:ijbfre:v:15:y:2021:i:1:p:89-98