Informed Trading in Stock and Option Markets

We investigate the contribution of option markets to price discovery, using a modification of Hasbrouck's (1995) "information share" approach. Based on five years of stock and options data for 60 firms, we estimate the option market's contribution to price discovery to be about 17% on average. Option market price discovery is related to trading volume and spreads in both markets, and stock volatility. Price discovery across option strike prices is related to leverage, trading volume, and spreads. Our results are consistent with theoretical arguments that informed investors trade in both stock and option markets, suggesting an important informational role for options.     

期货市场的交易量与价格波动

本文检验了美国期货市场WTI原油、S＆P500指数和10年期国债品种的日内、日间价格波动与日内交易量、隔日交易量之间的关系,发现预期的日内和隔日交易量都有平抑期货市场价格波动的作用,非预期的隔日交易量与期货价格波动之间有正相关关系,非预期的目内交易量对价格波动的影响不显著。从信息对称性的角度分析,预期的交易量中含有更多信息,能抑制期货价格的偏离;非预期的交易量主要由信息反馈者提供,他们往往对期货价格的变动做出过度反应,从而加剧价格波动。     

Intraday Price Discovery in the DJIA Index Markets

Abstract:  This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange-traded fund (ETF), the floor-traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E-mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi-market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution.     

The Informational Role of Option Trading Volume in Equity Index Options Markets

This paper examines the dynamic relations between future price volatility of the S&P 500 index and trading volume of S&P 500 options to explore the informational role of option volume in predicting the price volatility. The future volatility of the index is approximated alternatively by implied volatility and by EGARCH volatility. Using a simultaneous equation model to capture the volume-volatility relations, the paper finds that strong contemporaneous feedbacks exist between the future price volatility and the trading volume of call and put options. Previous option volumes have a strong predictive ability with respect to the future price volatility. Similarly, lagged changes in volatility have a significant predictive power for option volume. Although the volume-volatility relations for individual volatility and volume terms are somewhat different under the two volatility measures, the results on the predictive ability of volume (volatility) for volatility (volume) are broadly similar between the implied and EGARCH volatilities. These findings support the hypothesis that both the information- and hedge-related trading explain most of the trading volume of equity index options.     

Trading Volume and Market Volatility: Developed versus Emerging Stock Markets

We investigate the relation between volatility and volume in 22 developed markets and 27 emerging markets. Compared to developed markets, emerging markets show a greater response to large information shocks and exhibit greater sensitivity to unexpected volume. We find a negative relation between expected volume and volatility in several emerging markets, which can be attributed to the relative inefficiency in those markets. Previous research reports that the persistence in volatility is not eliminated when lagged or contemporaneous trading volume is considered. Our findings show that, when volume is decomposed into expected and unexpected components, volatility persistence decreases.     

Earnings Announcements,Stock Price Adjustment,and the Existence of Option Markets

This paper employs a new approach to study the effects of option trading on the behavior of underlying stock prices. Extant research compares distributional properties of the stock price at two points in time divided by an event in the option market that might affect price behavior. As an alternative, we examine the stock price adjustment to the release of quarterly earnings using samples of firms with and without listed options. We find the two samples exhibit different adjustment processes, with the nonoption firms requiring substantially more time to adjust.     

Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets

This article focuses on the information effects between the futures market and its spot market. Intraday data are used to investigate the lead-lag relationships between the returns and trading activity of Taiwan stock index futures and the spot returns. We focus on the transmission direction and the sources of information. Consistent with most previous studies, our results show that other than the contemporaneous relationship predicted by carry-cost theory and efficient market theory, futures returns significantly lead spot returns, which implies that informed trades may occur in the futures market. Using private transaction information, net open buy, as a proxy for futures trading activity and distinguishing different types of futures traders, we find that foreign institutional traders are the major source of informed trades because their trading has predictive power for future movements in both spot and futures prices. Traders in other categories are information laggards.     

Intraday Behavior of Stock Prices and Trades around Insider Trading

Our evidence indicates that insiders' trades provide significant new information to market participants and they are incorporated more fully in stock prices as compared to noninsiders' trades. We find that market professionals do not front-run insiders' trades. Both insiders' purchases and sales result in significant contemporaneous and subsequent price impact, while sales by large shareholders result in a contemporaneous stock price decline that is subsequently reversed. The arrival of insider purchases reverse the prevailing negative order imbalances from third party trades and lead to piggy-backing by market professionals resulting in subsequent market purchase orders as well as stock price increases.     

Price Momentum and Trading Volume

This study shows that past trading volume provides an important link between 'momentum' and 'value' strategies. Specifically, we find that firms with high (low) past turnover ratios exhibit many glamour (value) characteristics, earn lower (higher) future returns, and have consistently more negative (positive) earnings surprises over the next eight quarters. Past trading volume also predicts both the magnitude and persistence of price momentum. Specifically, price momentum effects reverse over the next five years, and high (low) volume winners (losers) experience faster reversals. Collectively, our findings show that past volume helps to reconcile intermediate-horizon 'underreaction' and long-horizon 'overreaction' effects.     

The Cross-Sectional Relationship Between Trading Costs and Lead/Lag Effects in Stock & Option Markets

Prior empirical research has failed to settle the question of lead/lag effects between stock and option markets. This study investigates the relation between cross-sectional differences in trading costs and intraday lead/lag effects in stock and option markets. The data for the study comprise 19 firms sampled at five-minute intervals over a two-month period. Consistent with a trading cost hypothesis, results indicate overall stock market leading behavior. However, the lead appears to be related to option market trading costs. This study uses an error correction model framework to investigate the lead/lag effects. This approach provides information on both the long run equilibrating process as well as the short term interactions between stock and option markets. Information regarding the long run equilibrating process is important to the overall understanding of lead/lag effects and cannot be determined from time series models of differenced data. Specific criteria for assessing lead/lag effects in cointegrated series are also proposed. One advantage of these new criteria is their ability to identify leading behavior in the presence of feedback. All models are estimated with quote data and are constructed to eliminate overnight effects. Hence, the results are robust to previously identified distortions due to closing, overnight, and potential non-trading effects. However, caution should be employed in generalizing the results as the study covers a two-month trading period for a limited number of firms.     

Trading and Pricing in Upstairs and Downstairs Stock Markets

We provide empirical evidence on the economic benefits of negotiatingtrades in the upstairs trading room of brokerage firms relativeto the downstairs market. Using Helsinki Stock Exchange data,we find that upstairs trades tend to have lower informationcontent and lower price impacts than downstairs trades. Thisis consistent with the hypotheses that the upstairs market isbetter at pricing uninformed liquidity trades and that upstairsbrokers can give better prices to their customers if they knowthe unexpressed demands of other customers. We find that theseeconomic benefits depend on price discovery occurring in thedownstairs market.     

Trading Volume and Cross-Autocorrelations in Stock Returns

This paper finds that trading volume is a significant determinant of the lead-lag patterns observed in stock returns. Daily and weekly returns on high volume portfolios lead returns on low volume portfolios, controlling for firm size. Nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings. These patterns arise because returns on low volume portfolios respond more slowly to information in market returns. The speed of adjustment of individual stocks confirms these findings. Overall, the results indicate that differential speed of adjustment to information is a significant source of the cross-autocorrelation patterns in short-horizon stock returns.     

Trading Volume and Transaction Costs in Specialist Markets

Prior work with competitive rational expectations equilibrium models indicates that there should be a positive relation between trading volume and differences in beliefs or information among traders. We show that this result is sensitive to whether and how transaction costs are modeled. In a specialist market with endogenous transaction costs we show that trading volume can be negatively related to the degree of informational asymmetry in the market. Our analysis highlights the dependence of volume on market structure, and our results suggest that the “volume effects” of corporate or macroeconomic events reflect a decrease, rather than an increase, in heterogeneity of beliefs or asymmetry of information.     

中国股市股票交易信息与股票横截面收益研究

本文基于沪深股市1993-2008年剔除了金融类股的所有A股数据,研究了股票动量因素、反转因素和换手率等股票交易信息对股票收益横截面的影响。研究结果表明,股票的一年期的动量因素对股票的横截面收益的影响不显著,股票的三个月的短期反转因素对股票的横截面收益有显著影响,股票的三个月的累计收益越低,其在接下来一期获得的收益就可能越高。股票的换手率对股票的横截面收益的影响也显著,股票的上一期的换手率越高,在接下来的一期获得的收益就可能越低。     

Explaining Intraday Pattern of Trading Volume from the Order Flow Data

Based on a comprehensive order flow data from the Taiwan stock market, this study examines directly how the intraday pattern of trading volume is related to the trading behavior of both informed and uninformed traders. The results indicate that both informed and uninformed investors have a strong desire to place orders at the market open and the close. Most of the orders at the market open are conservative and hence are waiting orders for price priority. The findings show that intraday trading volume as well as the real orders from both types of investors are J-shaped. In addition, both information and liquidity trading can explain the intraday pattern of trading volume. However, the impact of liquidity trading on volume is slightly higher than that of information trading.     

Intraday Price Formation in U.S. Equity Index Markets

The market for U.S. equity indexes presently comprises floor‐traded index futures contracts, exchange‐traded funds (ETFs), electronically traded, small‐denomination futures contracts (E‐minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq‐100 indexes, most of the price discovery occurs in the E‐mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction.     

动量交易策略及我国股票市场实证分析

动量交易策略指的是事先针对股票收益及交易量设定过滤规则,一旦股票收益或者股票收益和交易量同时满足过滤规则就买入或卖出股票的交易策略。动量交易策略的理论基础是行为金融学。国外投资者已经成功地在实践中应用了该策略。我国股票市场是否存在动量效应,还未形成统一的结论。在总结国内外学者研究方法的基础上,利用目前可用的数据,对我国股票市场在中期条件下动量交易策略的适用性进行了实证研究。但得出的结论并不支持存在动量效应。     

The Relationship Between Stock and Option Price Changes

This paper documents an important step in reconciling conflicting results by Manaster and Rendleman [16] and Stephan and Whaley [21] regarding price change relationships between options and their underlying stocks. Using recent advances in bi-directional causality testing and data sources available only fairly recently, statistical tests are conducted that mitigate the nonsynchroneity and bid-ask bias problems that may have affected the Manaster and Rendleman [16] study. Even with these adjustments, empirical results are consistent with Manaster and Rendleman [16], indicating that stock price changes adjust to lagged option price changes over two trading days. Moreover, results suggest that the causality is bi-directional.     

Intraday Stock Price Reactions to Interim-Quarter versus Fourth-Quarter Earnings Announcements

This study investigates intraday patterns of quarterly return-earnings relations. We find that fourth quarter announcements exhibit a lower earnings response coefficient but a more rapid adjustment to new equilibrium levels of prices and a higher R2 than interim quarter announcements. While prior short event window studies document that interim quarter earnings have greater explanatory power than fourth quarter earnings or annual earnings, our analysis indicates that the prior results may be driven by the use of two-day event window that is much wider than what it takes for the market to adjust to fourth quarter announcements.     

The Informational Role of Stock and Option Volume

This article analyzes the intraday interdependence of orderflows and price movements for actively traded NYSE stocks andtheir Chicago Board Options Exchange (CBOE)-traded options.Stock net trade volume (buyer-initiated volume minus seller-initiatedvolume) has strong predictive ability for stock and option quoterevisions, but option net trade volume has no incremental predictiveability. This suggests that informed investors initiate tradesin the stock market but not in the option market. On the otherhand, both stock and option quote revisions have predictiveability for each other. Thus, while information in the stockmarket is contained in both quote revisions and trades, informationin the option market is contained only in quote revisions.