Publication Type
Journal Article
Version
acceptedVersion
Publication Date
3-2014
Abstract
After executing option orders, options market makers turn to the stock market to hedge away the underlying stock exposure. As a result, the stock exposure imbalance in option transactions translates into an imbalance in stock transactions. This paper decomposes the total stock order imbalance into an imbalance induced by option transactions and an imbalance independent of options. The analysis shows that the option-induced imbalance significantly predicts future stock returns in the cross section, but the imbalance independent of options only has a transitory price impact. Further investigation suggests that options order flow contains important information about the underlying stock value.
Keywords
Options, Order flow, Information asymmetry, Delta hedging, Price discovery
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Financial Economics
Volume
111
Issue
3
First Page
625
Last Page
645
ISSN
0304-405X
Identifier
10.1016/j.jfineco.2013.12.004
Publisher
Elsevier
Citation
HU, Jianfeng.
Does Option Trading Convey Stock Price Information?. (2014). Journal of Financial Economics. 111, (3), 625-645.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3607
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jfineco.2013.12.004