Abstract
Original language | English |
---|---|
Pages (from-to) | 601 - 622 |
Number of pages | 22 |
Journal | Journal of Financial Economics |
Volume | 120 |
Issue number | 3 |
DOIs | |
Publication status | Published - 2016 |
Keywords
- Option trading volume
- Stock return predictability
- Information
- Leverage
Cite this
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Why does the option to stock volume ratio predict stock returns? / Ge, Li; Lin, Tse-Chun; Pearson, Neil D.
In: Journal of Financial Economics, Vol. 120, No. 3, 2016, p. 601 - 622.Research output: Contribution to journal › Article › Research › peer-review
TY - JOUR
T1 - Why does the option to stock volume ratio predict stock returns?
AU - Ge, Li
AU - Lin, Tse-Chun
AU - Pearson, Neil D.
PY - 2016
Y1 - 2016
N2 - Abstract We use data on signed option volume to study which components of option volume predict stock returns and resolve the seemingly inconsistent results in the literature. We find no evidence that trades related to synthetic short positions in the underlying stocks contain more information than trades related to synthetic long positions. Purchases of calls that open new positions are the strongest predictor of returns, followed by call sales that close out existing purchased call positions. Overall, our results indicate that the role of options in providing embedded leverage is the most important channel why option trading predicts stock returns.
AB - Abstract We use data on signed option volume to study which components of option volume predict stock returns and resolve the seemingly inconsistent results in the literature. We find no evidence that trades related to synthetic short positions in the underlying stocks contain more information than trades related to synthetic long positions. Purchases of calls that open new positions are the strongest predictor of returns, followed by call sales that close out existing purchased call positions. Overall, our results indicate that the role of options in providing embedded leverage is the most important channel why option trading predicts stock returns.
KW - Option trading volume
KW - Stock return predictability
KW - Information
KW - Leverage
U2 - 10.1016/j.jfineco.2015.08.019
DO - 10.1016/j.jfineco.2015.08.019
M3 - Article
VL - 120
SP - 601
EP - 622
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 3
ER -