Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-25T06:26:43.284Z Has data issue: false hasContentIssue false
  • English
  • Français

Options Trading and Stock Price Informativeness

Published online by Cambridge University Press:  05 April 2023

Jie Cao ,
Amit Goyal Open the ORCID record for Amit Goyal [Opens in a new window] ,
Sai Ke  and
Xintong Zhan Open the ORCID record for Xintong Zhan [Opens in a new window]
Jie Cao
Affiliation:
Hong Kong Polytechnic University School of Accounting and Finance jie.cao@polyu.edu.hk
Amit Goyal
Affiliation:
University of Lausanne Swiss Finance Institute amit.goyal@unil.ch
Sai Ke
Affiliation:
University of Mississippi School of Business saike.fina@gmail.com
Xintong Zhan*
Affiliation:
Fudan University School of Management
*
xintongzhan@fudan.edu.cn (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We document the causal effects of single-name options trading on the absolute level of information content of prices (stock price informativeness) by exploiting the Penny Pilot Program as an exogenous shock to options trading volume. We find that options trading increases underlying stock price informativeness and information acquisition by both option and stock investors, consistent with the framework of Goldstein and Yang (2015). The findings are driven by firms for which options are more important sources of information and firms with more efficiently priced options. Options market introduction in a sample of 25 other economies also leads to higher price informativeness.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 4 , June 2024 , pp. 1516 - 1540
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Snehal Banerjee, Ji-Woong Chung, Jennifer Conrad (the editor), Olivier Dessaint, Jianfeng Hu, Wenxi Jiang, Dmitriy Muravyev, Maureen O’Hara, Neil Pearson, Yaxuan Qi, Alessio Saretto, Valeri Sokolovski, Tianyu Wang, Jing Xie, seminar participants at Korean Securities Association, Hong Kong Polytechnic University, National University of Singapore, University of Brisbane, and University of New South Wales, and participants at the Canadian Derivatives Institute (CDI) 2018 Annual Conference, the 2022 China International Conference in Finance (CICF), Finance Down Under 2020 Conference, the SFS Cavalcade Asia-Pacific 2019 Annual Conference, and Western Finance Association (WFA) 2019 Annual Meeting for helpful comments. The work was supported by the Research Grant Council of the Hong Kong Special Administrative Region, China (Project Nos. GRF 14500919, 14501720, and 14500621). Xintong Zhan gratefully acknowledges the financial support from the National Natural Science Foundation of China (Grant No. 72271061). We are grateful for research assistance from Yaojia (Zoe) Zhang. All errors are our own.

References

Anand, A.; Hua, J.; and McCormick, T.. “Make-Take Structure and Market Quality: Evidence from the US Options Markets.” Management Science, 62 (2016), 3271–3290.10.1287/mnsc.2015.2274CrossRefGoogle Scholar
Back, K. “Asymmetric Information and Options.” Review of Financial Studies, 6 (1993), 435–472.10.1093/rfs/5.3.435CrossRefGoogle Scholar
Bai, J.; Philippon, T.; and Savov, A.. “Have Financial Markets Become More Informative?” Journal of Financial Economics, 122 (2016), 625–654.10.1016/j.jfineco.2016.08.005CrossRefGoogle Scholar
Bennett, B.; Stulz, R.; and Wang, Z.. “Does the Stock Market Make Firms More Productive?” Journal of Financial Economics, 136 (2020), 281–306.10.1016/j.jfineco.2019.09.006CrossRefGoogle Scholar
Biais, B., and Hillion, P.. “Insider and Liquidity Trading in Stock and Options Markets.” Review of Financial Studies, 7 (1994), 743–780.10.1093/rfs/7.4.743CrossRefGoogle Scholar
Black, F. “Fact and Fantasy in the Use of Options.” Financial Analysts Journal, 31 (1975), 36–41.10.2469/faj.v31.n4.36CrossRefGoogle Scholar
Boehmer, E., and Kelley, E. K.. “Institutional Investors and the Informational Efficiency of Prices.” Review of Financial Studies, 22 (2009), 3563–3594.10.1093/rfs/hhp028CrossRefGoogle Scholar
Brunnermeier, M. K. “Information Leakage and Market Efficiency.” Review of Financial Studies, 18 (2005), 417–457.10.1093/rfs/hhi015CrossRefGoogle Scholar
Cao, H. H. “The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium.” Review of Financial Studies, 12 (1999), 131–163.10.1093/rfs/12.1.131CrossRefGoogle Scholar
Chakravarty, S.; Gulen, H.; and Mayhew, S.. “Informed Trading in Stock and Option Markets.” Journal of Finance, 59 (2004), 1235–1257.10.1111/j.1540-6261.2004.00661.xCrossRefGoogle Scholar
Chen, Q.; Goldstein, I.; and Jiang, W.. “Price Informativeness and Investment Sensitivity to Stock Price.” Review of Financial Studies, 20 (2007), 619–650.10.1093/rfs/hhl024CrossRefGoogle Scholar
Chen, Q., and Jiang, W.. “Analysts’ Weighting of Private and Public Information.” Review of Financial Studies, 19 (2006), 319–355.10.1093/rfs/hhj007CrossRefGoogle Scholar
Da, Z.; Engelberg, J.; and Gao, P.. “In Search of Attention.” Journal of Finance, 66 (2011), 1461–1499.10.1111/j.1540-6261.2011.01679.xCrossRefGoogle Scholar
Danielsen, B. R., and Sorescu, S. M.. “Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints.” Journal of Financial and Quantitative Analysis, 36 (2001), 451–484.10.2307/2676220CrossRefGoogle Scholar
Fernandes, N., and Ferreira, M. A.. “Insider Trading Laws and Stock Price Informativeness.” Review of Financial Studies, 22 (2009), 1845–1887.10.1093/rfs/hhn066CrossRefGoogle Scholar
Ferreira, D.; Ferreira, M. A.; and Raposo, C. C.. “Board Structure and Price Informativeness.” Journal of Financial Economics, 99 (2011), 523–545.10.1016/j.jfineco.2010.10.007CrossRefGoogle Scholar
Figlewski, S., and Webb, G. P.. “Options, Short Sales, and Market Completeness.” Journal of Finance, 48 (1993), 761–777.10.1111/j.1540-6261.1993.tb04738.xCrossRefGoogle Scholar
Goldstein, I., and Yang, L.. “Information Diversity and Complementarities in Trading and Information Acquisition.” Journal of Finance, 70 (2015), 1723–1765.10.1111/jofi.12226CrossRefGoogle Scholar
Grossman, S. J., and Stiglitz, J. E.. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70 (1980), 393–408.Google Scholar
Hakansson, N. H. “Welfare Aspects of Options and Supershares.” Journal of Finance, 33 (1978), 759–776.10.2307/2326472CrossRefGoogle Scholar
Hasbrouck, J. “Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement.” Review of Financial Studies, 6 (1993), 191–212.10.1093/rfs/6.1.191CrossRefGoogle Scholar
Hasbrouck, J. “One Security, Many Markets: Determining the Contributions to Price Discovery.” Journal of Finance, 50 (1995), 1175–1199.10.1111/j.1540-6261.1995.tb04054.xCrossRefGoogle Scholar
Hou, K.; Peng, L.; and Xiong, W.. “Is R 2 a Measure of Market Inefficiency?” Working Paper, Ohio State University, City University of New York, Princeton University, available at https://ssrn.com/abstract=954559 (2013).Google Scholar
Hu, J. “Option Listing and Information Asymmetry.” Review of Finance, 22 (2018), 1153–1194.10.1093/rof/rfx015CrossRefGoogle Scholar
Jacob, J.; Lys, T. Z.; and Neale, M. A.. “Expertise in Forecasting Performance of Security Analysts.” Journal of Accounting and Economics, 28 (1999), 51–82.10.1016/S0165-4101(99)00016-6CrossRefGoogle Scholar
Jiang, W. “Have Instrumental Variables Brought Us Closer to the Truth.” Review of Corporate Finance Studies, 6 (2017), 127–140.10.1093/rcfs/cfx015CrossRefGoogle Scholar
Jin, L., and Myers, S. C.. “R 2 Around the World: New Theory and New Tests.” Journal of Financial Economics, 79 (2006), 257–292.10.1016/j.jfineco.2004.11.003CrossRefGoogle Scholar
Kacperczyk, M.; Sundaresan, S.; and Wang, T.. “Do Foreign Institutional Investors Improve Price Efficiency?” Review of Financial Studies, 34 (2021), 1317–1367.10.1093/rfs/hhaa076CrossRefGoogle Scholar
Kumar, R.; Sarin, A.; and Shastri, K.. “The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis.” Journal of Finance, 53 (1998), 717–732.10.1111/0022-1082.285595CrossRefGoogle Scholar
Lang, M. H., and Lundholm, R. J.. “Corporate Disclosure Policy and Analyst Behavior.” Accounting Review, 71 (1996), 467–492.Google Scholar
Lee, C. M., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733–746.10.1111/j.1540-6261.1991.tb02683.xCrossRefGoogle Scholar
Leuz, C.; Nanda, D.; and Wysocki, P. D.. “Earnings Management and Investor Protection: an International Comparison.” Journal of Financial Economics, 69 (2003), 505–527.10.1016/S0304-405X(03)00121-1CrossRefGoogle Scholar
Massa, M. “Financial Innovation and Information: The Role of Derivatives When a Market for Information Exists.” Review of Financial Studies, 15 (2002), 927–957.10.1093/rfs/15.3.927CrossRefGoogle Scholar
Mayhew, S., and Mihov, V. T.. “Short Sale Constraints, Overvaluation, and the Introduction of Options.” Working Paper, Texas Christian University, available at https://papers.ssrn.com/abstract=544245 (2005).10.2139/ssrn.544245CrossRefGoogle Scholar
Merkley, K.; Michaely, R.; and Pacelli, J.. “Does the Scope of the Sell-side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports.” Journal of Finance, 72 (2017), 1285–1334.10.1111/jofi.12485CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.10.1016/S0304-405X(00)00071-4CrossRefGoogle Scholar
Pan, J., and Poteshman, A. M.. “The Information in Option Volume for Future Stock Prices.” Review of Financial Studies, 19 (2006), 871–908.10.1093/rfs/hhj024CrossRefGoogle Scholar
Roll, R. “ R 2 .” Journal of Finance, 43 (1988), 541–566.Google Scholar
Roll, R.; Schwartz, E.; and Subrahmanyam, A.. “Options Trading Activity and Firm Valuation.” Journal of Financial Economics, 94 (2009), 345–360.10.1016/j.jfineco.2009.02.002CrossRefGoogle Scholar
Ross, S. A. “Options and Efficiency.” Quarterly Journal of Economics, 90 (1976), 75–89.10.2307/1886087CrossRefGoogle Scholar
Sorescu, S. M. “The Effect of Options on Stock Prices: 1973 to 1995.” Journal of Finance, 55 (2000), 487–514.10.1111/0022-1082.00214CrossRefGoogle Scholar
Wurgler, J. “Financial Markets and the Allocation of Capital.” Journal of Financial Economics, 58 (2000), 187–214.10.1016/S0304-405X(00)00070-2CrossRefGoogle Scholar