Option Volume Imbalance as a predictor for equity market returns

Nikolas Michael, Mihai Cucuringu and Sam Howison

Papers from arXiv.org

Abstract: We investigate the use of the normalized imbalance between option volumes corresponding to positive and negative market views, as a predictor for directional price movements in the spot market. Via a nonlinear analysis, and using a decomposition of aggregated volumes into five distinct market participant classes, we find strong signs of predictability of excess market overnight returns. The strongest signals come from Market-Maker volumes. Among other findings, we demonstrate that most of the predictability stems from high-implied-volatility option contracts, and that the informational content of put option volumes is greater than that of call options.

Date: 2022-01
New Economics Papers: this item is included in nep-fmk and nep-rmg
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