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Full-Text Articles in Business
Volume, Volatility And Information Linkages In The Stock And Option Markets, Kin-Yip Ho, Lin Zheng, Zhaoyong Zhang
Volume, Volatility And Information Linkages In The Stock And Option Markets, Kin-Yip Ho, Lin Zheng, Zhaoyong Zhang
Zhaoyong Zhang
This paper examines the relationship between option trading activity and stock market volatility. Although the option market is uniquely suited for trading on volatility information, there is little analysis on how trading activity in this market is linked to stock price volatility. The bulk of the discussion tends to focus on whether trading activity in the stock market is informative about stock volatility. To analyze the information in option trading activity for stock market volatility, a sample of 15 stocks with the highest option trading volume is selected. For each stock, it is noted that the trading activities in the …
Modeling Information Linkages In The Stock And Options Markets, K Ho, L Zheng, Zhaoyong Zhang
Modeling Information Linkages In The Stock And Options Markets, K Ho, L Zheng, Zhaoyong Zhang
Zhaoyong Zhang
When markets are assumed to be complete, option trading should not contain new information for market participants, as options derive their prices from the underlying stocks. However, if markets are incomplete, then this unidirectional relationship may not be true, because informed traders may prefer to trade options instead of the underlying stocks for several reasons: one, option trading involves lower transaction costs and higher financial leverage; and two, investors who have private information about stock price volatility can only make their bet on volatility in the option market. Compared with the research on the relationship between options trading activity and …