IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v67y2021i3p1758-1778.html
   My bibliography  Save this article

The joint cross section of stocks and options

Author

Listed:
  • Tarun Chordia
  • Alexander Kurov
  • Dmitriy Muravyev
  • Avanidhar Subrahmanyam

Abstract

Do order flows in index derivatives play an informational role? Weekly index put order flow on the International Securities Exchange positively and robustly predicts weekly S&P 500 index returns. This result obtains mainly for net put buying and is stronger in high VIX periods and in periods following macroeconomic announcements. We explore rationales for our findings, which include investor sentiment, the notion that market makers trade on information in options markets, and option-based risk protection strategies used by retail investors. The last explanation accords best with our analysis. This paper was accepted by Tyler Shumway, finance.

Suggested Citation

  • Tarun Chordia & Alexander Kurov & Dmitriy Muravyev & Avanidhar Subrahmanyam, 2021. "The joint cross section of stocks and options," Management Science, INFORMS, vol. 67(3), pages 1758-1778, March.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:3:p:1758-1778
    DOI: 10.1287//mnsc.2019.3529
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287//mnsc.2019.3529
    Download Restriction: no
    File URL: https://libkey.io/10.1287//mnsc.2019.3529?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    3. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    4. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2011. "What Does Equity Sector Orderflow Tell Us About the Economy?," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3688-3730.
    5. Gorton, Gary B & Pennacchi, George G, 1993. "Security Baskets and Index-Linked Securities," The Journal of Business, University of Chicago Press, vol. 66(1), pages 1-27, January.
    6. Back, Kerry, 1993. "Asymmetric Information and Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-472.
    7. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    8. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    9. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    10. Dmitriy Muravyev, 2016. "Order Flow and Expected Option Returns," Journal of Finance, American Finance Association, vol. 71(2), pages 673-708, April.
    11. Jun Pan & Allen M. Poteshman, 2006. "The Information in Option Volume for Future Stock Prices," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 871-908.
    12. Menkveld, Albert J. & Sarkar, Asani & Wel, Michel van der, 2012. "Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-Free Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(4), pages 821-849, August.
    13. repec:bla:jfinan:v:59:y:2004:i:2:p:711-753 is not listed on IDEAS
    14. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    15. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    16. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    17. Kurov, Alexander & Lasser, Dennis J., 2004. "Price Dynamics in the Regular and E-Mini Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 365-384, June.
    18. Allaudeen Hameed & Wenjin Kang & S. Viswanathan, 2010. "Stock Market Declines and Liquidity," Journal of Finance, American Finance Association, vol. 65(1), pages 257-293, February.
    19. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    20. Alain P. Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2014. "Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 69(5), pages 2045-2084, October.
    21. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    22. Hu, Jianfeng, 2014. "Does option trading convey stock price information?," Journal of Financial Economics, Elsevier, vol. 111(3), pages 625-645.
    23. Cao, H Henry, 1999. "The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 131-163.
    24. Stephen A. Ross, 1976. "Options and Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(1), pages 75-89.
    25. Bing Han, 2008. "Investor Sentiment and Option Prices," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 387-414, January.
    26. Bernile, Gennaro & Hu, Jianfeng & Tang, Yuehua, 2016. "Can information be locked up? Informed trading ahead of macro-news announcements," Journal of Financial Economics, Elsevier, vol. 121(3), pages 496-520.
    27. Bates, David S., 2008. "The market for crash risk," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2291-2321, July.
    28. Kurov, Alexander & Sancetta, Alessio & Strasser, Georg & Wolfe, Marketa Halova, 2019. "Price Drift Before U.S. Macroeconomic News: Private Information about Public Announcements?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(1), pages 449-479, February.
    29. Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011. "Price discovery in currency markets," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1696-1718.
    30. Muravyev, Dmitriy & Pearson, Neil D. & Paul Broussard, John, 2013. "Is there price discovery in equity options?," Journal of Financial Economics, Elsevier, vol. 107(2), pages 259-283.
    31. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    32. Chordia, Tarun & Subrahmanyam, Avanidhar, 2004. "Order imbalance and individual stock returns: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 72(3), pages 485-518, June.
    33. repec:bla:jfinan:v:59:y:2004:i:3:p:1235-1258 is not listed on IDEAS
    34. Cremers, Martijn & Weinbaum, David, 2010. "Deviations from Put-Call Parity and Stock Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 335-367, April.
    35. Anand, Amber & Subrahmanyam, Avanidhar, 2008. "Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 1-28, March.
    36. Yigit Atilgan & Turan G. Bali & K. Ozgur Demirtas, 2015. "Implied Volatility Spreads and Expected Market Returns," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(1), pages 87-101, January.
    37. repec:bla:jfinan:v:59:y:2004:i:6:p:2623-2654 is not listed on IDEAS
    38. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    39. Grossman, Sanford J & Zhou, Zhongquan, 1996. "Equilibrium Analysis of Portfolio Insurance," Journal of Finance, American Finance Association, vol. 51(4), pages 1379-1403, September.
    40. Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 743-780.
    41. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2014. "Trading activity in the equity market and its contingent claims: An empirical investigation," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 13-35.
    2. Xingguo Luo & Xiaoli Yu & Shihua Qin & Qi Xu, 2020. "Option trading and the cross‐listed stock returns: Evidence from Chinese A–H shares," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1665-1690, November.
    3. Gkionis, Konstantinos & Kostakis, Alexandros & Skiadopoulos, George & Stilger, Przemyslaw S., 2021. "Positive stock information in out-of-the-money option prices," Journal of Banking & Finance, Elsevier, vol. 128(C).
    4. Bing Han & Gang Li, 2021. "Information Content of Aggregate Implied Volatility Spread," Management Science, INFORMS, vol. 67(2), pages 1249-1269, February.
    5. David Weinbaum & Andrew Fodor & Dmitriy Muravyev & Martijn Cremers, 2023. "Option Trading Activity, News Releases, and Stock Return Predictability," Management Science, INFORMS, vol. 69(8), pages 4810-4827, August.
    6. Nimalendran, Mahendrarajah & Rzayev, Khaladdin & Sagade, Satchit, 2024. "High-frequency trading in the stock market and the costs of options market making," LSE Research Online Documents on Economics 124228, London School of Economics and Political Science, LSE Library.
    7. 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).
    8. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    9. 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.
    10. Kim, Donghan & Kim, Jun Sik & Seo, Sung Won, 2018. "What options to trade and when: Evidence from seasoned equity offerings," Journal of Financial Markets, Elsevier, vol. 37(C), pages 70-96.
    11. Davide E Avino & Enrique Salvador, 2024. "Contingent Claims and Hedging of Credit Risk with Equity Options," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 310-348.
    12. Liu, Dehong & Qiu, Qi & Hughen, J. Christopher & Lung, Peter, 2019. "Price discovery in the price disagreement between equity and option markets: Evidence from SSE ETF50 options of China," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 557-571.
    13. Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    14. Zhou, Yi, 2022. "Option trading volume by moneyness, firm fundamentals, and expected stock returns," Journal of Financial Markets, Elsevier, vol. 58(C).
    15. Chen, Zhuo & Lu, Andrea, 2017. "Slow diffusion of information and price momentum in stocks: Evidence from options markets," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 98-108.
    16. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    17. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2015, January-A.
    18. Lee, Jaeram & Ryu, Doojin & Yang, Heejin, 2021. "Does vega-neutral options trading contain information?," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 294-314.
    19. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2022. "Informed options strategies before corporate events," LawFin Working Paper Series 39, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    20. Chang‐Mo Kang & Donghyun Kim & Junyong Kim & Geul Lee, 2022. "Informed trading of out‐of‐the‐money options and market efficiency," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 247-279, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:67:y:2021:i:3:p:1758-1778. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.