Detecting abnormal trading activities in option markets |
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| Institution: | 1. University of Zurich, Department of Banking and Finance, Plattenstrasse 32, CH-8032 Zurich, Switzerland;2. UBS AG, Stockerstrasse 64, P.O. Box 8092, Zurich, Switzerland;3. EPFL, Swiss Finance Institute at EPFL, Quartier UNIL-Dorigny, Extranef 217, CH-1015 Lausanne, Switzerland;1. Luxembourg School of Finance, University of Luxembourg, Luxembourg;2. Banque centrale du Luxembourg, Luxembourg;1. School of Business and Economics, Loughborough University, Sir Richard Morris Building, Leicestershire LE11 3TU, UK;2. Department of Economics, University of Bath, Claverton Down, Bath BA2 7AY, UK;3. RSJ Algorithmic Trading, Na Florenci 2116/15, 110 00 Prague 1, Czech Republic;4. Economic Research Department, Czech National Bank, Na Příkopě 28, 115 03 Prague 1, Czech Republic;1. Chinese University of Hong Kong, Shenzhen, China;2. London School of Economics and Political Science (LSE), Houghton Street, London WC2A 2AE, United Kingdom;3. Shenzhen Stock Exchange, China;4. Princeton University, United States |
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| Abstract: | We develop an econometric method to detect “abnormal trades” in option markets, i.e., trades which are not driven by liquidity motives. Abnormal trades are characterized by unusually large increments in open interest, trading volume, and option returns, and are not used for option hedging purposes. We use a multiple hypothesis testing technique to control for false discoveries in abnormal trades. We apply the method to 9.6 million of daily option prices. |
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