Excess returns to buying low options‐volume stocks and selling high options‐volume stocks: Information or characteristics?
Li Cai and
Journal of Futures Markets, 2018, vol. 38, issue 12, 1487-1513
This paper documents a negative relationship between options‐trading volume and stock returns. The relationship is remarkably robust and cannot be explained by existing asset‐pricing theorems. We find that strategies that require buying stocks with low options‐trading volume in the past and selling stocks with high options‐trading volume in the past generate significant positive abnormal returns. Further analysis indicates that the pattern mostly represents a characteristic effect, in which options trading predicts stock returns through its relationship with determinant characteristics such as beta, illiquidity, and idiosyncratic volatility.
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