IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v14y2004i16p1197-1210.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000280483
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/0960310042000280483?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
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    2. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    3. Ramaprasad Bhar & A. G. Malliaris, 2015. "Volume and Volatility in Foreign Currency Futures Markets," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 5, pages 103-123, World Scientific Publishing Co. Pte. Ltd..
    4. Yacine Aït-Sahalia & Andrew W. Lo, "undated". "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," CRSP working papers 332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
    6. Engle, Robert F & Ng, Victor K, 1993. "Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-1778, December.
    7. Kalok Chan & Y. Peter Chung & Wai-Ming Fong, 2002. "The Informational Role of Stock and Option Volume," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1049-1075.
    8. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    9. Sheikh, Aamir M & Ronn, Ehud I, 1994. "A Characterization of the Daily and Intraday Behavior of Returns on Options," Journal of Finance, American Finance Association, vol. 49(2), pages 557-579, June.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    11. repec:bla:jfinan:v:53:y:1998:i:2:p:431-465 is not listed on IDEAS
    12. Merville, Larry J. & Pieptea, Dan R., 1989. "Stock-price volatility, mean-reverting diffusion, and noise," Journal of Financial Economics, Elsevier, vol. 24(1), pages 193-214, September.
    13. Vijh, Anand M, 1990. "Liquidity of the CBOE Equity Options," Journal of Finance, American Finance Association, vol. 45(4), pages 1157-1179, September.
    14. repec:bla:jfinan:v:53:y:1998:i:2:p:499-547 is not listed on IDEAS
    15. Das, Sanjiv Ranjan & Sundaram, Rangarajan K., 1999. "Of Smiles and Smirks: A Term Structure Perspective," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(2), pages 211-239, June.
    16. Barone-Adesi, Giovanni & Whaley, Robert E, 1987. "Efficient Analytic Approximation of American Option Values," Journal of Finance, American Finance Association, vol. 42(2), pages 301-320, June.
    17. Manaster, Steven & Rendleman, Richard J, Jr, 1982. "Option Prices as Predictors of Equilibrium Stock Prices," Journal of Finance, American Finance Association, vol. 37(4), pages 1043-1057, September.
    18. Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    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. Ghulam Sarwar, 2005. "The Informational Role of Option Trading Volume in Equity Index Options Markets," Review of Quantitative Finance and Accounting, Springer, vol. 24(2), pages 159-176, January.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Diavatopoulos, Dean & Doran, James S. & Fodor, Andy & Peterson, David R., 2012. "The information content of implied skewness and kurtosis changes prior to earnings announcements for stock and option returns," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 786-802.
    4. 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.
    5. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    6. Chan, Kam C. & Chang, Yuanchen & Lung, Peter P., 2009. "Informed trading under different market conditions and moneyness: Evidence from TXO options," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 189-208, April.
    7. Avinash & T. Mallikarjunappa, 2020. "Informational Role of Open Interest and Transaction Volume of Options: A Meta-Analytic Review," FIIB Business Review, , vol. 9(4), pages 275-285, December.
    8. Peter A. Abken & Saikat Nandi, 1996. "Options and volatility," Economic Review, Federal Reserve Bank of Atlanta, vol. 81(Dec), pages 21-35.
    9. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers 95.400, Toulouse - GREMAQ.
    10. Christoffersen, Peter & Jacobs, Kris & Ornthanalai, Chayawat & Wang, Yintian, 2008. "Option valuation with long-run and short-run volatility components," Journal of Financial Economics, Elsevier, vol. 90(3), pages 272-297, December.
    11. Gunther Capelle-Blancard & Séverine Vandelanoite, 2000. "Intraday relations between CAC 40 cash index and CAC 40 index options [Relations intrajournalières entre l'indice CAC 40 et les options sur indice. Quel est le marché préféré des investisseurs info," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03727911, HAL.
    12. Andreas A. Andrikopoulos & Dimitrios C. Gkountanis, 2011. "Issues and Models in Applied Econometrics: A partial survey," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 9(2), pages 107-165.
    13. Guidolin, Massimo & Timmermann, Allan, 2003. "Option prices under Bayesian learning: implied volatility dynamics and predictive densities," Journal of Economic Dynamics and Control, Elsevier, vol. 27(5), pages 717-769, March.
    14. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    15. Faff, Robert & Hillier, David, 2005. "Complete markets, informed trading and equity option introductions," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1359-1384, June.
    16. Kapetanios, George & Konstantinidi, Eirini & Neumann, Michael & Skiadopoulos, George, 2019. "Jumps in option prices and their determinants: Real-time evidence from the E-mini S&P 500 options market," Journal of Financial Markets, Elsevier, vol. 46(C).
    17. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    18. Chen, Carl R. & Lung, Peter P. & Tay, Nicholas S. P., 2005. "Information flow between the stock and option markets: Where do informed traders trade?," Review of Financial Economics, Elsevier, vol. 14(1), pages 1-23.
    19. Joshua Rosenberg, 1999. "Implied Volatility Functions: A Reprise," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-027, New York University, Leonard N. Stern School of Business-.
    20. Rourke, Thomas, 2014. "The delta- and vega-related information content of near-the-money option market trading activity," Journal of Financial Markets, Elsevier, vol. 20(C), pages 175-193.

    More about this item

    Statistics

    Access and download statistics

    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:taf:apfiec:v:14:y:2004:i:16:p:1197-1210. 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 Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    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.