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Directional information effects of options trading: Evidence from the banking industry

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  • Du, Brian
  • Fung, Scott

Abstract

This study examines the transmittance of directional information from the options trading process to equity values and the mechanism in which informed option trades translate to underlying asset valuations. We construct proxies for positive (negative) informed trades and find that they are associated with a value premium (discount). We demonstrate that information asymmetries in the banking industry accentuate the price discovery role of option trades, especially negatively informed trades. The results are consistent with the arguments in Miller (1977), which contends that overvaluation is pronounced in securities that are short-sale constrained and highly informationally opaque. During the short-sale ban of financial stocks in 2008, negative informed trades have a positive effect on short interest, suggesting that value implications are the result of hedging-related behavior by market makers.

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  • Du, Brian & Fung, Scott, 2018. "Directional information effects of options trading: Evidence from the banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 149-168.
    • Handle: RePEc:eee:intfin:v:56:y:2018:i:c:p:149-168
    DOI: 10.1016/j.intfin.2018.02.009
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    3. Scott Fung & Robert Loveland, 2020. "When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1459-1485, October.

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    More about this item

    Keywords

    Options; Information efficiency; Opaqueness; Short-sell ban; Banking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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