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Options trading imbalance, cash-flow news, and discount-rate news

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  • Chichernea, Doina
  • Huang, Kershen
  • Petkevich, Alex
  • Teterin, Pavel

Abstract

Using publicly available information on option volume totals, we develop new measures of directional option-to-stock (O/S) trading volume imbalance. The novel measures are strongly related to the cash-flow (CF) and discount-rate (DR) news components of unexpected stock returns and consistently predict future abnormal performance. While options markets respond more strongly to CF news than do equity markets, they still do not fully incorporate CF news into prices and therefore lead to returns predictability. This underreaction phenomenon is of smaller magnitude when the options market response is stronger and when short-sale constraints are less binding.

Suggested Citation

  • Chichernea, Doina & Huang, Kershen & Petkevich, Alex & Teterin, Pavel, 2024. "Options trading imbalance, cash-flow news, and discount-rate news," Journal of Empirical Finance, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:empfin:v:77:y:2024:i:c:s0927539824000264
    DOI: 10.1016/j.jempfin.2024.101491
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    More about this item

    Keywords

    Option volume; Cash-flow news; Underreaction; Market efficiency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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