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The informational role of option trading volume in the S&P 500 futures options markets

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  • Ghulam Sarwar

Abstract

This paper analyses the dynamic relations between future price volatility of the S&P 500 index futures and trading volume of S&P 500 futures options to examine the informational role of the option volume in predicting the future price volatility. Using a pooled cross-sectional and time-series data framework, the paper uses the error components and dummy variable models to allow for the relations between volatility and volume to vary by the option's time-to-maturity and moneyness. The results suggest that previous call and put volumes have a strong predictive ability with respect to the future price volatility. The results also indicate that the future price volatility has a leading positive effect on the option volume, but that the rises and falls in volatility exert asymmetric influences on the option volume. These findings support the hypothesis that both the information- and hedge-related trading explain most of the trading volume of S&P 500 futures options.

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  • Ghulam Sarwar, 2004. "The informational role of option trading volume in the S&P 500 futures options markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(16), pages 1197-1210.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:16:p:1197-1210
    DOI: 10.1080/0960310042000280483
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    Cited by:

    1. Eui Jung Chang & Benjamin Miranda Tabak, 2007. "Are implied volatilities more informative? The Brazilian real exchange rate case," Applied Financial Economics, Taylor & Francis Journals, vol. 17(7), pages 569-576.

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