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Articles 1 - 9 of 9
Full-Text Articles in Finance and Financial Management
Derivatives And Market (Il)Liquidity, Shiyang Huang, Bart Zhou Yueshen, Cheng Zhang
Derivatives And Market (Il)Liquidity, Shiyang Huang, Bart Zhou Yueshen, Cheng Zhang
Research Collection Lee Kong Chian School Of Business
We study how derivatives (with nonlinear payoffs) affect the underlying assets liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors relative delta hedging sensitivity, i.e., the gamma of the derivatives. The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading.
Who Profits From Trading Options?, Jianfeng Hu, Antonia Kirilova, Gilbert Seongkyu Park, Doojin. Ryu
Who Profits From Trading Options?, Jianfeng Hu, Antonia Kirilova, Gilbert Seongkyu Park, Doojin. Ryu
Research Collection Lee Kong Chian School Of Business
We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. Approximately 66% of active retail investors predominantly hold simple, one-sided positions in only one class of options, whereas institutional investors are more likely to use complex strategies. Hypothesizing that the complexity of trading styles reflects investors' skills, we examine the effect of options trading styles on investment performance. We find that retail investors using simple strategies lose to the rest of the market. For both retail and institutional investors, selling volatility is the most successful strategy. We conclude that these style effects are persistent …
Is The Synthetic Stock Price Really Lower Than Actual Price?, Jianfeng Hu
Is The Synthetic Stock Price Really Lower Than Actual Price?, Jianfeng Hu
Research Collection Lee Kong Chian School Of Business
Conventional wisdom suggests synthetic stock prices are lower than actual prices due to short‐sale constraints and voting premiums. This study finds that such underpricing of the synthetic midquote disappears if arbitrageurs face security borrowing costs. The synthetic spread predominantly contains the actual spread. Synthetic stock overpricing is as common as underpricing but the former is more persistent and more profitable. The difference between synthetic and actual quotes is significantly affected by options market makers' hedging costs and investors' demand for leverage.
European Floating Strike Lookback Options: Alpha Prediction And Generation Using Unsupervised Learning, Tristan Lim, Aldy Gunawan, Chin Sin Ong
European Floating Strike Lookback Options: Alpha Prediction And Generation Using Unsupervised Learning, Tristan Lim, Aldy Gunawan, Chin Sin Ong
Research Collection School Of Computing and Information Systems
This research utilized the intrinsic quality of European floating strike lookback call options, alongside selected return and volatility parameters, in a K-means clustering environment, to recommend an alpha generative trading strategy. The result is an elegant easy-to-use alpha strategy based on the option mechanisms which identifies investment assets with high degree of significance. In an upward trending market, the research had identified European floating strike lookback call option as an evaluative criterion and investable asset, which would both allow investors to predict and profit from alpha opportunities. The findings will be useful for (i) buy-side investors seeking alpha generation and/or …
Are Corporate Spin-Offs Prone To Insider Trading?, Patrick Augustin, Menachem Brenner, Jianfeng Hu, Marti Subrahmanyam
Are Corporate Spin-Offs Prone To Insider Trading?, Patrick Augustin, Menachem Brenner, Jianfeng Hu, Marti Subrahmanyam
Research Collection Lee Kong Chian School Of Business
Despite abundant empirical evidence of informed trading ahead of major corporate events, no such evidence has been reported in the case of corporate spinoff (SP) announcements. This is surprising, as SP announcements are unexpected, and are also associated with a positive price jump in the parent company’s stock. Using a sample of 280 US announcement events from 1996 to 2013, we document significant pre-announcement informed trading activity in options for about 9 to 16% of events in our sample. In contrast, we find statistically insignificant evidence of informed trading in stocks, suggesting that informed traders employ leverage through options. In …
Center Of Volume Mass: Does Options Trading Predict Stock Returns?, Gennaro Bernile, Fei Gao, Jianfeng Hu
Center Of Volume Mass: Does Options Trading Predict Stock Returns?, Gennaro Bernile, Fei Gao, Jianfeng Hu
Research Collection Lee Kong Chian School Of Business
We examine whether the distribution of trades along the set of strike prices of option contracts on the same stock contains information about underlying price discovery. We show that option traders' demand for delta exposure drives the volume-weighted average strike-spot price ratio (VWKS). In turn, we find that VWKS predicts underlying returns and anticipates the flow of fundamental information about the stock. The return predictability is greater but not limited to stocks with higher information asymmetries and arbitrage costs, and becomes stronger ahead of value relevant news. Overall, options trading appears to play an important informational role for underlying markets.
Option Listing And Information Asymmetry, Jianfeng Hu
Option Listing And Information Asymmetry, Jianfeng Hu
Research Collection Lee Kong Chian School Of Business
Option listing increases informed and uninformed trading by 12.4% and 23.9%, respectively, in the US between 2001 and 2010, hence reducing relative information risk. We establish the causal effects using control stocks with similar propensities of listing and a quasi-natural experiment using option listing standards. The benefits are more prominent for stocks with active options trading and opaque stocks. The reduction of information risk is larger for good news than bad news, and the stock price response to earnings surprise weakens after listing. The results suggest that options improve the overall market information environment beyond substitutional effects to stock trading.
Essay On Asset Pricing, Fei Gao
Essay On Asset Pricing, Fei Gao
Dissertations and Theses Collection (Open Access)
We uncover a novel stock return predictor from the options market, the volume-weighted strike-spot price ratio (VWKS) across all traded option contracts. High (low) VWKS indicates that the mass of options volume on an underlying stock centers at the out-of-the-money region of call (put) options. Empirically, VWKS has positive and robust predictive ability for underlying returns after controlling for a long list of variables including known return predictors from the options market, stock illiquidity, and past stock returns, and has more persistent and stronger predictive power for stocks with higher information asymmetry and arbitrage costs. We also find that VWKS …
Does Option Trading Convey Stock Price Information?, Jianfeng Hu
Does Option Trading Convey Stock Price Information?, Jianfeng Hu
Research Collection Lee Kong Chian School Of Business
After executing option orders, options market makers turn to the stock market to hedge away the underlying stock exposure. As a result, the stock exposure imbalance in option transactions translates into an imbalance in stock transactions. This paper decomposes the total stock order imbalance into an imbalance induced by option transactions and an imbalance independent of options. The analysis shows that the option-induced imbalance significantly predicts future stock returns in the cross section, but the imbalance independent of options only has a transitory price impact. Further investigation suggests that options order flow contains important information about the underlying stock value.