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Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases

Author

Listed:
  • Ihsan Badshah

    (Department of Finance, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand)

  • Hardjo Koerniadi

    (Department of Finance, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand)

  • James Kolari

    (Department of Finance, Texas A&M University, College Station, TX 77843-4218, USA)

Abstract

The informed options trading hypothesis posits that option prices lead stock prices. In this paper, we extended the research on this hypothesis to open-market share repurchases. Empirical tests showed that the implied volatility spread was not significantly related to buy-and-hold abnormal stock returns. However, further evidence reveal a significant relationship between implied volatility spread and subsequent stock return volatility around open-market share repurchase events. We concluded that option traders have private information on the volatility of stock returns and superior information processing ability that accounts for prescient pricing behavior in options relative to stocks.

Suggested Citation

  • Ihsan Badshah & Hardjo Koerniadi & James Kolari, 2019. "Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases," JRFM, MDPI, vol. 12(4), pages 1-11, November.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:4:p:179-:d:292380
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    References listed on IDEAS

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    1. Chan, Konan & Ge, Li & Lin, Tse-Chun, 2015. "Informational Content of Options Trading on Acquirer Announcement Return," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(5), pages 1057-1082, October.
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    6. Ihsan Badshah & Hardjo Koerniadi & James Kolari, 2021. "The Sarbanes‐Oxley act and informed trading in the options market: Evidence from share repurchase announcements," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 645-652, June.
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    Cited by:

    1. Małgorzata Janicka & Aleksandra Pieloch-Babiarz & Artur Sajnóg, 2020. "Does Short-Termism Influence the Market Value of Companies? Evidence from EU Countries," JRFM, MDPI, vol. 13(11), pages 1-22, November.

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