Informed options trading on the implied volatility surface: A cross‐sectional approach
Da‐Hea Kim and
Journal of Futures Markets, 2020, vol. 40, issue 5, 776-803
This study investigates the cross‐sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one‐way information transmission from options markets to stock markets by adopting well‐known option‐implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long‐term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short‐term components. Our findings indicate that the inter‐market information asymmetry rapidly disappears before the expiration of long‐term option contracts.
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:40:y:2020:i:5:p:776-803
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