Publication Type

Journal Article

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

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

Copyright Owner and License

Author

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.1016/j.jfineco.2013.12.004

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