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Option Trading and REIT Returns

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  • George D. Cashman
  • David M. Harrison
  • Hainan Sheng

Abstract

This article examines the relation between option trading volume and real estate investment trust (REIT) market performance. Specifically, we find that option volume increases are followed by decreases in returns. Furthermore, the portion of option volume that is orthogonal to REIT characteristics drives the observed return predictability relation, thereby suggesting that the return predictability of option trading is (at least partially) attributable to information‐based explanations. Finally, consistent with informed traders favoring option market activities due to short‐sale costs and/or constraints, we find option based return predictability is more evident within REITs than non‐REITs, even though firms within this industry are generally viewed as informationally transparent.

Suggested Citation

  • George D. Cashman & David M. Harrison & Hainan Sheng, 2021. "Option Trading and REIT Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 332-389, March.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:1:p:332-389
    DOI: 10.1111/1540-6229.12256
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    Cited by:

    1. Cashman, George D. & Harrison, David M. & Sheng, Hainan, 2022. "Short sales, short risk, and return predictability in Asia-Pacific real estate markets," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    2. George D. Cashman & David M. Harrison & Hainan Sheng, 2022. "Short selling and options trading: A tale of two markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 313-338, June.
    3. Cao, Jie & Han, Bing & Song, Linjia & Zhan, Xintong, 2023. "Option price implied information and REIT returns," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 13-28.
    4. Sheng, Hainan, 2022. "Option measures and stock characteristics," Finance Research Letters, Elsevier, vol. 44(C).

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