Option trading after the opening bell and intraday stock return predictability

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option-to-stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.     

An Examination of Stock Market Return Volatility During Overnight and Intraday Periods, 1964–1989

This paper examines the variance of hourly market returns during 1964–1989. Results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods. Market variance is also shown to change significantly over time, rising after NASDAQ began in 1971, rising after trading in stock options began in 1973, falling after fixed commissions were eliminated in 1975, rising after trading in stock index futures was introduced in 1982, and falling after margin requirements for stock index futures became larger in 1988.     

Intraday volatility in the stock index and stock index futures markets

We examine the intraday relationship between returns and returnsvolatility in the stock index and stock index futures markets.Our results indicate a strong intermarket dependence in thevolatility of the case and futures returns. Price innovationsthat originate in either the stock or futures markets can predictthe future volatility in the other market. We show that thisrelationship persists even during periods in which the dependencein the returns themselves appears to weaken. The findings arerobust to controlling for potential market frictions such asasynchronous trading in the stock index. Our results have implicationsfor understanding the pattern of information flows between thetwo markets.     

Intraday Returns and the Frequency of Trading at the Ask on the Sydney Futures Exchange: A Research Note

This article documents and provides explanations for intraday patterns in returns for the Share Price Index (SPI) futures contract traded on the Sydney Futures Exchange (SFE). Consistent with overseas futures markets research, a positive and significant overnight return is documented. Unlike overseas futures markets, we find little evidence of an end of day price rise. Our evidence suggests that overnight returns for the SPI contract are largely driven by the way returns are typically measured, which ignores the fact that there is a significantly greater frequency of sellers at the market close and buyers at the start of the day. These patterns are consistent with hedging behaviour by futures traders with long positions in the underlying stock.     

Do DOW returns really influence the intraday Spanish stock market behavior?

Although the behavior of the Spanish stock market has been studied from many different points of view, none of the previous research has ever analyzed the influence of previous daytime, overnight and daily returns from the DOW and IBEX upon 5-min intraday returns of the IBEX throughout the complete trading session. Clear evidence is provided relative to the influence of the DOW. The main finding that it underreacts to the DOW returns in the first hours of trading but overreacts during the last 2 h (after the opening of the US markets) would help to develop a profitable trading strategy.     

Futures trading volume as a determinant of prices in different momentum phases

Recent studies contend that trading volume has predictive power for ex ante stock prices, particularly small stocks that do not react quickly to macroeconomic information. This study postulates that a significant amount of macro-information that flows on to stock markets is derived from derivative markets. We examine the impact of short-term futures trading volume and prices on cash stock prices using a case study of 15-min data from the Australian stock index futures market which reports actual trading volume. After applying vector error correction modelling (VECM), variance decomposition and impulse functions, we conclude that futures prices provide a short-term information lead to stock prices that dominates trading volume effects. We also observe asymmetric changes in the impact of trading volume between bull and bear price momentum phases and after large trading volume shocks. These results suggest that, in future, studies on trading volume should control for the cross-correlation impact from derivative prices and the differential impact of trading phases.     

THE OVERNIGHT AND DAILY TRANSMISSION OF STOCK INDEX FUTURES PRICES BETWEEN MAJOR INTERNATIONAL MARKETS

Stock index futures prices for the world's major equity markets, Japan, the UK and the US, are used to examine the interaction of international equity markets. By using stock index futures prices, we avoid the nonsynchronous data problem inherent with opening and closing market averages. We find that the US is the dominant world market; overnight returns in Japan and the UK are greatly influenced by the US daily returns. In contrast, the Japanese market has no impact on the overnight or daily returns in the UK, while the UK daily performance has a small influence on Japanese overnight returns. Slight evidence of over-reaction at the opening of Japanese futures exists as the daily Nikkei returns are negatively related to the US returns.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.     

International transmission of information: evidence from the Euroyen and Eurodollar futures markets

This paper examines the information transmission between Japan and the US by using the Tokyo Euroyen and Chicago Eurodollar futures. These two interest rate futures markets provide a better understanding of international information transmission than stock markets, which have been shown to exhibit nonsynchronous trading and market segmentation. The results show that traders in Tokyo (Chicago) use information that is revealed overnight in Chicago (Tokyo). The bivariate EGARCH-t model provides no evidence of volatility spillovers in either direction, suggesting that the opening price rapidly reflects foreign information. The overall results support the hypothesis that the domestic market efficiently adjusts to foreign news. The results are also broadly consistent with the covered interest arbitrage effects.     

The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes

The media are increasingly recognized as key players in financial markets. I investigate their causal impact on trading and price formation by examining national newspaper strikes in several countries. Trading volume falls 12% on strike days. The dispersion of stock returns and their intraday volatility are reduced by 7%, while aggregate returns are unaffected. Moreover, analysis of return predictability indicates that newspapers propagate news from the previous day. These findings demonstrate that the media contribute to the efficiency of the stock market by improving the dissemination of information among investors and its incorporation into stock prices.     

The Influence of Information Arrival on Market Microstructure: Evidence from Three Related Markets

This study examines the influence of information arrival on market microstructure for the MMI, NYSE, and S&P 500 stock index futures markets, with special emphasis on the effects of opening and closing of trading and expiration of contracts on price movements and trading activities. The results of the examination show that although the opening of the (MMI) futures market is associated with higher volatility, it is when the spot market opens that volatility reaches its highest level. Similarly, the closing of the futures markets, though more volatile, is not as volatile as the closing of the spot markets. Trading patterns, on the other hand, are distinct from volatility. For MMI, trading declines consistently after the close of the spot market. In contrast, the NYSE and S&P 500 continue to trade and reach a peak at the close of the futures markets. Expiration effects are evidenced by the increase in volatility and trading near the closing of the MMI and the spillover to the NYSE and S&P 500. In sharp contrast, the expirations of the NYSE and S&P 500 are only assooiated with decrease in trading, suggesting that efforts to dampen volatility by changing expiration days from Friday to Thursday and shifting settlement price from Friday close to Friday open, have been successful.     

Intraday and interday volatility in the Japanese stock market

This paper characterizes the volatility in the Japanese stock market based on a 4-year sample of 5-min Nikkei 225 returns from 1994 through 1997. The intradaily volatility exhibits a doubly U-shaped pattern associated with the opening and closing of the separate morning and afternoon trading sessions on the Tokyo Stock Exchange. This feature is consistent with market microstructure theories that emphasize the role of private and asymmetric information in the price formation process. Meanwhile, readily identifiable Japanese macroeconomic news announcements explain little of the day-to-day variation in the volatility, confirming previous findings for US equity markets. Furthermore, by appropriately filtering out the strong intradaily periodic pattern, the high-frequency returns reveal the existence of important long-memory interdaily volatility dependencies. This supports recent results stressing the importance of exploiting high-frequency intraday asset prices in the study of long-run volatility properties of asset returns.     

限制交易政策如何影响期现关系?——对股指期货价格发现功能的实证检验

本文利用2015年中国股市大幅下跌期间,对股指期货严格限制交易政策这一独特事件前后的高频数据,研究限制交易政策对股指期货与股票市场价格引导关系的影响。利用I-S模型和分位数回归方法的实证结果表明:限制交易政策实施前,股指期货对股票市场的价格影响更强,尤其表现在价格急剧下跌时期;限制交易政策显著增加了期货市场交易成本,从而降低了期货市场的信息份额,削弱了其对股票市场的价格影响,并且改变了期货价格对现货价格“助跌强于助涨”的影响模式,增强了股指期货在价格上涨时对股票市场的影响。研究结果一方面直接量化了期货交易成本变动对其价格发现功能的负面影响,另一方面也从价格引导关系的视角提供了股市危机时期股指期货限制交易政策监管效果的实证证据。     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

The Lead‐Lag Relationship Between Cash and Stock Index Futures in a New Market

This paper investigates the lead‐lag relationship in daily returns and volatilities between price movements of the FTSE/ATHEX‐20 and FTSE/ATHEX Mid‐40 stock index futures and the underlying cash indices in the relatively new futures market of Greece. Empirical results show that there is a bi‐directional relationship between cash and futures prices. However, futures lead the cash index returns, by responding more rapidly to economic events than stock prices. This speed is much higher in the more liquid FTSE/ATHEX‐20 market. Moreover, results indicate that futures volatilities spill information over to the corresponding cash market volatilities in both investigated futures markets, but volatilities in the cash markets have no effect on the volatilities of futures markets. Overall, it seems that new market information is disseminated faster in the futures market compared to the stock market. This implies that the futures markets can be used as price discovery vehicles, providing further evidence that derivatives markets contribute to completing and stabilising capital markets in Greece. A further finding of this study is that futures volume and disequilibrium effects between cash and futures prices are important variables in the explanation of volatilities in cash and futures markets.     

Price discovery in the round-the-clock U.S. Treasury market

We evaluate the efficacy of price discovery in the round-the-clock U.S. Treasury market. Using a comprehensive intraday database, we explore informational role of trades over the 24-hour day. We find that information asymmetry is generally highest in the preopen period and lowest in the postclose period. Information asymmetry in the overnight period is comparable to that in the regular trading period. However, on days with macroeconomic announcements, information asymmetry peaks shortly after the news release at 8:30. Moreover, information asymmetry is higher on Monday morning and higher immediately before than after the open of U.S. Treasury futures trading. Although volume is low after hours and trading cost is relatively high, overnight trading generates significant price discovery. Results suggest that overnight trading activity is an important part of the Treasury price discovery process.     

Stock market automation and the transmission of information between spot and futures markets

This paper examines the impact of automated trading in the stock market on the information transmission between the stock and futures markets. This issue is of particular relevance given the trend of exchanges to introduce automated trading. We focus on the Australian market as its institutional features and recent changes in trading systems have created an ideal environment for examining this issue. We initially find evidence of a substantial bidirectional information flow between the stock and futures markets. The paper then focuses on the period surrounding the move by the Australian stock exchange to automated trading. After the introduction of automated trading, we find a significant change in the information transfer process between the two markets. The findings are consistent with the hypothesis that automated trading results in a richer and more timely information set which accelerates the price discovery process. However, the evidence is not overwhelming and alternative explanations exist.     

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of more than five years of 5‐minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behaviour in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock markets’ intraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.     

交易限制与股票市场定价效率——基于创业板涨跌幅限制放宽的准自然实验研究

本文基于2020年8月24日创业板涨跌幅限制由10%扩大到20%这一政策变化建立准自然实验,从市场层面与公司事件层面探讨交易限制放宽的外生冲击下市场定价效率的变化。研究发现,涨跌幅限制放宽政策实施后,股票价格能更灵敏地反映公开市场信息,更多地包含公司层面特质信息,整体市场定价效率显著提升。进一步研究表明,涨跌幅限制放宽有效缓解了交易干扰问题,避免了过度交易行为延后,缓解了波动性外溢与价格发现延迟。异质性分析表明,无论是市场层面定价效率改善,还是事件层面波动性外溢、价格发现推迟与交易干扰问题的缓解,均在低信息透明度公司中更为显著。本文研究发现为验证涨跌幅限制会抑制股票市场定价效率的理论提供了直接经验证据,同时为推广完善市场化交易制度提供了有益启示。     

Asymmetric Volume‐Return Relation and Concentrated Trading in LIFFE Futures

This study demonstrates that intraday volume and return on LIFFE interest rate and currency futures exhibit an asymmetric volume‐return relationship characterised by significantly larger volume associated with negative returns than with non‐negative returns. This finding is unlike the stylised asymmetric relation often observed in equity markets, where the volume on price rise is larger than the volume on price decline. The asymmetric relationship in LIFFE futures is also found to be dynamic as the direction of asymmetry can reverse during the day. It has been argued in the past that a costly short sale restriction that requires a higher transaction cost on a short position than on a long position is responsible for the asymmetric effect in equity markets. Since such a restriction is absent in futures markets, they should not exhibit any asymmetric volume behaviour. Based on the results of this research, the costly short sale hypothesis is rejected. An alternative explanation of the asymmetric relation observed in futures is presented based on recent information models that take into consideration asymmetrically‐informed traders, their dispersion of beliefs, quality and quantity of the information signal, and how the traders process it. The paper also confirms a strong U‐shape trading pattern in 15‐minute volume, but no such pattern is identified in intraday returns.