Delisle, R. Jared and Lee, Bong Soo and Mauck, Nathan (2012): The dynamic relation between short sellers, option traders, and aggregate returns.
Download (688kB) | Preview
Contrary to existing event studies around option listing introductions, we show short selling and options trading are complements, rather than substitutes. Further, while a plethora of literature demonstrates both short sellers and option traders are informed traders, relatively little is known about which group is relatively more informed. The results of our dynamic tests indicate that options traders are relatively more informed and that short sellers are backward-looking. Our results support the claim that options markets are non-redundant.
|Item Type:||MPRA Paper|
|Original Title:||The dynamic relation between short sellers, option traders, and aggregate returns|
|Keywords:||Short selling, options market, informed traders|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G10 - General
|Depositing User:||Nathan Mauck|
|Date Deposited:||12 Nov 2012 14:49|
|Last Modified:||03 May 2016 06:07|
Aitken, Michael J., Alex Frino, Michael S. McCorry, and Peter L. Swan, 1998, Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange, Journal of Finance 53, 2205-2223.
Asquith, Paul, and Lisa Meulbroek, 1995, An Empirical Investigation of Short Interest, Working Paper.
Asquith, Paul, Parag A. Pathak, and Jay R. Ritter, 2005, Short interest, institutional ownership, and stock returns, Journal of Financial Economics 78, 243-276.
Bali, Turan G., and Armen Hovakimian, 2009, Volatility Spreads and Expected Stock Returns, Management Science 55, 1797-1812.
Barone-Adesi, G., K. C. Brown, and W. V. Harlow, 1994, On the Use of Implied Stock Volatilities in the Prediction of Successful Corporate Takeovers, Advances in Futures and Options Research 7, 147-166.
Battalio, Robert, and Paul Schultz, 2006, Options and the Bubble, Journal of Finance 61, 2071-2102.
Battalio, Robert, and Paul Schultz, 2011, Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets, Journal of Finance 66, 2013-2053.
Black, Fischer, 1975, Fact and Fantasy in the Use of Options, Financial Analysts Journal 31, 36-72.
Blau, Benjamin M., and Tyler Brough, 2011a, Short Sales and Option Listing Decisions, Utah State University Working paper.
Blau, Benjamin M., and Tyler Brough, 2011b, The Substitutability between Short Sales and Bearish-Option Activity, Utah State University Working paper.
Blau, Benjamin M., and J. M. Pinegar, 2012, Do Short-Selling Prophets Currently Profit from Short Selling Around Earnings Announcements?, Brigham Young University Working paper.
Boehme, Rodney D., Bartley R. Danielsen, and Sorin M. Sorescu, 2006, Short-Sale Constraints, Differences of Opinion, and Overvaluation, Journal of Financial and Quantitative Analysis 41, 455-487.
Boehmer, Ekkehart, Charles M. Jones, and Xiaoyan Zhang, 2008, Which Shorts Are Informed?, Journal of Finance 63, 491-527.
Boehmer, Ekkehart, and Juan Wu, 2012, Short Selling and the Price Discovery Process, Review of Financial Studies Forthcoming.
Box, G. E. P., and G. M. Jenkins, 1976. Time Series Analysis: Forecasting and Control (Holden-Day).
Buraschi, A, and J Jackwerth, 2001, The price of a smile: hedging and spanning in option markets, Review of Financial Studies 14, 495-527.
Buraschi, Andrea, and Alexei Jiltsov, 2006, Model Uncertainty and Option Markets with Heterogeneous Beliefs, Journal of Finance 61, 2841-2897.
Cao, Charles, Zhiwu Chen, and John M. Griffin, 2005, Informational Content of Option Volume Prior to Takeovers, Journal of Business 78, 1073-1109.
Chakravarty, Sugato, Huseyin Gulen, and Stewart Mayhew, 2004, Informed Trading in Stock and Option Markets, Journal of Finance 59, 1235-1258.
Chan, Kalok, Y. Peter Chung, and Wai-Ming Fong, 2002, The Informational Role of Stock and Option Volume, Review of Financial Studies 15, 1049-1075.
Chan, Kalok, Y. Peter Chung, and Herb Johnson, 1993, Why Option Prices Lag Stock Prices: A Trading-based Explanation, Journal of Finance 48, 1957-1967.
Christophe, Stephen E., Michael G. Ferri, and Jim Hsieh, 2010, Informed trading before analyst downgrades: Evidence from short sellers, Journal of Financial Economics 95, 85-106.
Cremers, Martijn, and David Weinbaum, 2010, Deviations from Put-Call Parity and Stock Return Predictability, Journal of Financial and Quantitative Analysis 45, 335-367.
D'Avolio, Gene, 2002, The market for borrowing stock, Journal of Financial Economics 66, 271-306.
Danielsen, Bartley R., and Sorin M. Sorescu, 2001, Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints, Journal of Financial and Quantitative Analysis 36, 451-484.
Danielsen, Bartley R., Bonnie F. van Ness, and Richard S. Warr, 2007, Reassessing the Impact of Option Introductions on Market Quality: A Less Restrictive Test for Event-Date Effects, Journal of Financial and Quantitative Analysis 42, 1041-1062.
Dechow, Patricia M., Amy P. Hutton, Lisa Meulbroek, and Richard G. Sloan, 2001, Short-sellers, fundamental analysis, and stock returns, Journal of Financial Economics 61, 77-106.
Desai, Hemang, Srinivasan Krishnamurthy, and Kumar Venkataraman, 2006, Do Short Sellers Target Firms with Poor Earnings Quality? Evidence from Earnings Restatements, Review of Accounting Studies 11, 71-90.
Desai, Hemang, K. Ramesh, S. Ramu Thiagarajan, and Bala V. Balachandran, 2002, An Investigation of the Informational Role of Short Interest in the Nasdaq Market, Journal of Finance 57, 2263-2287.
Diamond, Douglas, and Robert Verrecchia, 1987, Constraints on short-selling and asset price adjustment to private information, Journal of Financial Economics 18, 277-311.
Dickey, David A., and Wayne A. Fuller, 1979, Distribution of the Estimators for Autoregressive Time Series With a Unit Root, Journal of the American Statistical Association 74, 427-431.
Diether, Karl B., Kuan-Hui Lee, and Ingrid M. Werner, 2009, Short-Sale Strategies and Return Predictability, Review of Financial Studies 22, 575-607.
Drake, Michael S., Lynn Rees, and Edward P. Swanson, 2011, Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers, The Accounting Review 86, 101-130.
Easley, David, Maureen O'Hara, and P. S. Srinivas, 1998, Option Volume and Stock Prices: Evidence on Where Informed Traders Trade, Journal of Finance 53, 431-465.
Engelberg, Joseph, Adam V. Reed, and Matthew Ringgenberg, 2012, How are Shorts Informed? Short Sellers, News, and Information Processing, Journal of Financial Economics Forthcoming.
Evans, Richard B., Christopher C. Geczy, David K. Musto, and Adam V. Reed, 2009, Failure Is an Option: Impediments to Short Selling and Options Prices, Review of Financial Studies 22, 1955-1980.
Figlewski, Stephen, and Gwendolyn P. Webb, 1993, Options, Short Sales, and Market Completeness, Journal of Finance 48, 761-777.
Fuller, Wayne A., 1976. Introduction to Statistical Time Series (John Wiley, New York).
Granger, C. W. J., 1969, Investigating Causal Relations by Econometric Models and Cross-spectral Methods, Econometrica 37, 424-438.
Granger, C. W. J., and P. Newbold, 1986. Forecasting Economic Time Series (Academic Press).
Grundy, Bruce D., Bryan Lim, and Patrick Verwijmeren, 2012, Do option markets undo restrictions on short sales? Evidence from the 2008 short-sale ban, Journal of Financial Economics 106, 331-348.
Henry, Tyler R., and Jennifer L. Koski, 2010, Short Selling Around Seasoned Equity Offerings, Review of Financial Studies 23, 4389-4418.
Jayaraman, Narayanan, Melissa B. Frye, and Sanjiv Sabherwal, 2001, Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market, Financial Review 36, 45-74.
Jin, W. E. N., Joshua Livnat, and Yuan Zhang, 2012, Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?, Journal of Accounting Research 50, 401-432.
Johnson, Travis L., and Eric C. So, 2012, The Option to Stock Volume Ratio and Future Returns, Journal of Financial Economics Forthcoming.
Karpoff, J. M., and X. Lou, 2010, Short Sellers and Financial Misconduct, Journal of Finance 65, 1879-1913.
Lakonishok, Josef, Inmoo Lee, Neil D. Pearson, and Allen M. Poteshman, 2007, Option Market Activity, Review of Financial Studies 20, 813-857.
Lamont, Owen A., and Jeremy C. Stein, 2004, Aggregate Short Interest and Market Valuations, American Economic Review 94, 29-32.
Levy, Haim, and James A. Yoder, 1993, The Behavior of Option Implied Standard Deviations Around Merger and Acquisition Announcements, Financial Review 28, 261-272.
Liu, Harrison, and Edward P. Swanson, 2012, Silent Combat: Do Managers Use Share Repurchases to Trade against Short Sellers?, Working paper.
Manaster, Steven, and Richard J. Rendleman, Jr., 1982, Option Prices as Predictors of Equilibrium Stock Prices, Journal of Finance 37, 1043-1057.
Miller, Edward M., 1977, Risk, Uncertainty, and Divergence of Opinion, Journal of Finance 32, 1151-1168.
Muravyev, Dmitriy, Neil D. Pearson, and John Paul Broussard, 2012, Is There Price Discovery in Equity Options?, Journal of Financial Economics Forthcoming.
Ofek, Eli, Matthew Richardson, and Robert F. Whitelaw, 2004, Limited arbitrage and short sales restrictions: evidence from the options markets, Journal of Financial Economics 74, 305-342.
Pan, Jun, and Allen M. Poteshman, 2006, The Information in Option Volume for Future Stock Prices, Review of Financial Studies 19, 871-908.
Patell, James M., and Mark A. Wolfson, 1981, The Ex Ante and Ex Post Price Effects of Quarterly Earnings Announcements Reflected in Option and Stock Prices, Journal of Accounting Research 19, 434-458.
Phillips, Blake, 2011, Options, short-sale constraints and market efficiency: A new perspective, Journal of Banking & Finance 35, 430-442.
Phillips, Peter C. B., and Pierre Perron, 1988, Testing for a unit root in time series regression, Biometrika 75, 335-346.
Roll, Richard, Eduardo Schwartz, and Avanidhar Subrahmanyam, 2010, O/S: The relative trading activity in options and stock, Journal of Financial Economics 96, 1-17.
Safieddine, Assem, and William J. Wilhelm, Jr., 1996, An Empirical Investigation of Short-Selling Activity Prior to Seasoned Equity Offerings, Journal of Finance 51, 729-749.
Sims, Christopher A., 1972, Money, Income, and Causality, American Economic Review 62, 540-552.
Sorescu, Sorin M., 2000, The Effect of Options on Stock Prices: 1973 to 1995, Journal of Finance 55, 487-514.
Stephan, Jens A., and Robert E. Whaley, 1990, Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets, Journal of Finance 45, 191-220.
Vanden, Joel M., 2004, Options Trading and the CAPM, Review of Financial Studies 17, 207-238.
Vanden, Joel M., 2006, Option coskewness and capital asset pricing, Review of Financial Studies 19, 1279-1320.
Xing, Yuhang, Xiaoyan Zhang, and Rui Zhao, 2010, What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?, Journal of Financial and Quantitative Analysis 45, 641-662.