Does Option Trading Have a Pervasive Impact on Underlying Stock Prices?

Equity market impact

Sophie X Ni, Neil D Pearson, Allen M Poteshman, Joshua White and Andrew Karolyi

The Review of Financial Studies, 2021, vol. 34, issue 4, 1952-1986

Abstract: The question of whether and to what extent option trading affects underlying stock prices has been of interest to researchers since exchange-based options trading began in 1973. Recent research presents evidence of an informational channel through which option trading affects stock prices by showing that option market makers’ stock trades to hedge new options positions cause the information reflected in option trading to be impounded into underlying equity prices. This paper provides evidence of a noninformational channel through which option market maker hedge rebalancing affects stock return volatility and the probability of large stock price moves.

JEL-codes: G12 G13 G14 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (13)

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