The Informational Role of Option Trading Volume in Equity Index Options Markets

The Informational Role of Option Trading Volume in Equity Index Options Markets This paper examines the dynamic relations between future price volatility of the S&P 500 index and trading volume of S&P 500 options to explore the informational role of option volume in predicting the price volatility. The future volatility of the index is approximated alternatively by implied volatility and by EGARCH volatility. Using a simultaneous equation model to capture the volume-volatility relations, the paper finds that strong contemporaneous feedbacks exist between the future price volatility and the trading volume of call and put options. Previous option volumes have a strong predictive ability with respect to the future price volatility. Similarly, lagged changes in volatility have a significant predictive power for option volume. Although the volume-volatility relations for individual volatility and volume terms are somewhat different under the two volatility measures, the results on the predictive ability of volume (volatility) for volatility (volume) are broadly similar between the implied and EGARCH volatilities. These findings support the hypothesis that both the information- and hedge-related trading explain most of the trading volume of equity index options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The Informational Role of Option Trading Volume in Equity Index Options Markets

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-6335-0
Publisher site
See Article on Publisher Site

References

  • The Interrelation of Stock and Option Market Trading-Volume Data
    Anthony, J. H.
  • The Informational Role of Stock and Option Volume
    Chan, K.; Chung, Y. P.; Fong, W.-M.
  • Why Option Prices Lag Stock Prices: A Trading-Based Explanation
    Chan, K.; Chung, P. Y.; Johnson, H.
  • Does Options Trading Lead to Greater Cash Market Volatility?
    Chatrath, A.; Ramchander, S.; Song, F.
  • The Role of Futures Trading Activity in Exchange Rate Volatility
    Chatrath, A.; Ramchander, S.; Song, F.

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