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Index option trading activity and market returns

journal contribution
posted on 2021-03-01, 00:00 authored by Tarun ChordiaTarun Chordia, A Kurov, D Muravyev, A Subrahmanyam
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.

History

Journal

Management science

Volume

67

Issue

3

Pagination

1758 - 1778

Publisher

Institute for Operations Research and the Management Sciences

Location

[Providence, R.I.]

ISSN

0025-1909

eISSN

1526-5501

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

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