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Index option market activity and cash market volatility under different market conditions: an empirical study from Sweden

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  • Niclas Hagelin

Abstract

This study investigates the relationship between option market activity and cash market volatility on the OMX index. Option market activity is defined as trading volume divided by open interest and is assumed to reflect the specific impact of speculation. The study contributes by investigating empirical evidence relating to two periods with different market conditions. The findings show that for the complete sample period there is unidirectional causality from cash market volatility to option market activity for calls and puts jointly, as well as for calls and puts respectively. While unidirectional causality from cash market volatility to call option market activity is documented for both the subperiods, bilateral causality between put option market activity and cash market volatility was found for one of the subperiods. Finally, to further investigate the potential impact of index options on the volatility of the underlying cash market the expected and unexpected components of option market activity, trading volume, and open interest were also investigated.

Suggested Citation

  • Niclas Hagelin, 2000. "Index option market activity and cash market volatility under different market conditions: an empirical study from Sweden," Applied Financial Economics, Taylor & Francis Journals, vol. 10(6), pages 597-613.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:6:p:597-613
    DOI: 10.1080/096031000437953
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    References listed on IDEAS

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    1. Niemeyer, Jonas & Sandås, Patrik, 1995. "An Empirical Analysis of the Trading Structure at the Stockholm Stock Exchange," SSE/EFI Working Paper Series in Economics and Finance 44, Stockholm School of Economics.
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    Cited by:

    1. Bondarenko Mikhail & Bunin Serhii, 2018. "Analysis of the regional differentiation of the world financial market," Technology audit and production reserves, 5(43) 2018, Socionet;Technology audit and production reserves, vol. 5(5(43)), pages 37-44.
    2. John M. Fry & Baoying Lai & Mark Rhodes, 2011. "The interdependence of Coffee spot and futures market," Working Papers 2011.1, International Network for Economic Research - INFER.
    3. Bunin Serhii, 2019. "Calculation of the index of prerequisites for the functioning of the European insurance space in the context of integration directions of Ukraine," Technology audit and production reserves, 1(45) 2019, Socionet;Technology audit and production reserves, vol. 1(5(45)), pages 16-22.
    4. Joocheol Kim, 2005. "An investigation of the relationship between bond market volatility and trading activities: Korea treasury bond futures market," Applied Economics Letters, Taylor & Francis Journals, vol. 12(11), pages 657-661.
    5. Lee, Mingchih & Chen, Chun-Da, 2005. "The intraday behaviors and relationships with its underlying assets: evidence on option market in Taiwan," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 587-603.

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