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The interactions between trading volume and volatility: evidence from the equity options markets

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  • Tae Park
  • Lorne Switzer
  • Robert Bedrossian

Abstract

This study examines the relation between trading activity of equity options and the volatilities of the underlying equities. A sample of 45 companies with the most actively traded equity options at the Chicago Board of Options Exchange is selected and, for each company, equity price variability is compared with related stock and option trading volume. The significance of options trading activity in explaining the conditional volatilities of the underlying equities is comparable to that of stock trading activity, indicating a high degree of integration of the equity and the options markets. We also find that unexpected options trading activity contributes to enhanced volatility of the underlying equity returns. Finally, the analysis indicates that expected options trading activity significantly affects equity volatility in only a minority of firms. This is consistent with the contention that trading in the equity options market does not systematically lead to price destabilization in the underlying equity market.

Suggested Citation

  • Tae Park & Lorne Switzer & Robert Bedrossian, 1999. "The interactions between trading volume and volatility: evidence from the equity options markets," Applied Financial Economics, Taylor & Francis Journals, vol. 9(6), pages 627-637.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:6:p:627-637
    DOI: 10.1080/096031099332078
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    Cited by:

    1. Martín Saldías & Rafael Barbosa, 2013. "Option trade volume and volatility of banks’ stock returns," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. Rafiqul Bhuyan, 2002. "Information, Alternative Markets, and Security Price Processes: A Survey of Literature," Finance 0211002, University Library of Munich, Germany.
    3. Mende, Alexander, 2005. "09/11 on the USD/EUR Foreign Exchange Market," Hannover Economic Papers (HEP) dp-312, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. 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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