The Society for Financial Studies
The Information in Option Volume for Future Stock Prices
Author(s): Jun Pan and Allen M. Poteshman
Source: The Review of Financial Studies, Vol. 19, No. 3 (Autumn, 2006), pp. 871-908 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/3844016 .
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MIT Sloan School of Management
Alien M. Poteshman
University of Illinois at Urbana-Champaign
stock prices.Taking advantage of a unique data set, we construct put-call
optionvolumeinitiated buyers open newpositions.
stockswithhigh put-callratios by more than 40 basis
pointson thenextday and morethan1% overthenextweek.Partitioning option we
thatare publiclyand nonpublicly
the economic source of this predictability nonpublicinformation possessed by
option tradersratherthan marketinefficiency. also findgreaterpredictability forstockswithhigher
This article examines the informational content of option trading for future movements in underlying stock prices. This topic addresses the fundamental economic question of how information gets incorporated into asset prices and is also of obvious practical interest. Our main goals are to establish the presence of informed trading in the option market and also to explore several key issues regarding its nature.
Our focus on the informational role of derivatives comes at a time when derivatives play an increasingly important role in financial markets. Indeed, for the past several decades, the capital markets have experienced an impressive proliferation of derivative securities, ranging from equity options to fixed-income derivatives to, more recently, credit derivatives. Eileen
Smith, DickThaler assistance thedatausedinthis
discussions. aregrateful the
andsuggestions an anonymous
referee thecomments Michael
MarkRubinstein, Tetlock, seminar
at MIT,LBS, UIUC, the
Meetings, Fall 2003
Kellogg, Summer Econometric
2004WFA Meeting, 2004ChinaInternational
UBC, INSEAD, IMA, Duke Econ,Texas,HBS,
GSB,andHongKongUST. Reza Mahani Sophie
assistance. thanks MIT Laboratory Financial
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