Essays On The Interaction Of Option And Equity Markets PDF Download
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| Author | : Alexander Feser |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2020 |
| Genre | : |
| ISBN | : |
Download Essays on the Interaction of Option and Equity Markets Book in PDF, ePub and Kindle
How do option and equity markets interact with each other? This is the central question that is answered from three different angles in this dissertation. The first Chapter discusses how option-implied information is incorporated into equity markets. Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, it is shown that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. The findings provide novel insights in the joint interaction between option and equity markets and help to explain contradictory results in previous studies. The second chapter provides an in-depth analysis of how to estimate risk-neutral moments robustly. A simulation and an empirical study show that estimating risk-neutral moments presents a trade-off between (1) the bias of estimates caused by a limited strike price domain and (2) the variance of estimates induced by micro-structural noise. The best trade-off is offered by option-implied quantile moments estimated from a volatility surface interpolated with a local-linear kernel regression and extrapolated linearly. The third chapter expands volatility targeting to option strategies. The chapter shows that option trading strategies can be managed by increasing exposure if volatility is low and reducing exposure if volatility is high to achieve a constant risk exposure over time. These volatility controlled option strategies generate economically and statistically significant alphas over their unmanaged counterparts, have reduced maximum drawdowns, lower downside risk, and more normal return distributions.
| Author | : Xiaolong Lu |
| Publisher | : Open Dissertation Press |
| Total Pages | : |
| Release | : 2017-01-27 |
| Genre | : |
| ISBN | : 9781361354414 |
Download Analysts, Options Trading and Equity Short Selling Book in PDF, ePub and Kindle
This dissertation, "Analysts, Options Trading and Equity Short Selling" by Xiaolong, Lu, 盧曉瓏, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This dissertation consists of two empirical essays on the interactions among three financial markets, namely, the stock market, the options market, and the equity lending market. In the first essay, we study the role of analysts and options traders in the information transmission between options and stock markets. We first show that the predictive power of option-implied volatilities (IVs) on stock returns is more than doubled around analyst-related events, indicating a significant proportion of the options predictability on stock returns comes from informed options traders' information about upcoming analyst-related news. We examine three explanations for this finding: tipping, reverse tipping and common information. We find that analyst tipping to options traders is the most consistent explanation of these predictive patterns. In the second essay, we examine the relationship between put options and short sales. We are able to separate the speculative demand of informed traders from the hedging demand of options market makers in the lending market. We find that the put option bid-ask spread and put option trading volume both increase with the equity lending fee. However, we also find that put option trading volume decreases with the lending fee for banned stocks during the 2008 Short-Sale Ban period, i.e., when only options market makers can short. These findings suggest that when informed traders are allowed to short, their speculative demand dominates and drives the substitution that is observed between the two financial instruments. Nevertheless, the "complementarity" of these financial instruments might prevail when options market makers significantly reduce the supply of put options because of high hedging costs. DOI: 10.5353/th_b5270543 Subjects: Options (Finance) Short selling Stocks
| Author | : Mishuk Anwar Chowdhury |
| Publisher | : |
| Total Pages | : |
| Release | : 2012 |
| Genre | : Fear |
| ISBN | : |
Download Essays on Option Market Information Content, Market Segmentation and Fear Book in PDF, ePub and Kindle
This dissertation consists of three essays. The first essay tests whether stock returns can be predicted using divergence from put-call parity. Using a robust methodology that controls for the early exercise premium of American put and call options, the study shows that stocks with upside divergence from put-call parity outperform stocks with downside divergence from put-call parity. Predictability is persistent over multiple holding periods and divergence is also predictive of tail events. The second essay examines segmentation of equity and option markets in the presence of information asymmetry. The study uses the slope of the implied volatility skew as a proxy for negative jump risk, option implied stock price as a measure of deviation from put-call parity, and the daily short-sell volume ratio as a measure of negative information flow in the equity market. The option market based signals predict future returns more reliably than the short-sell based signals. Short-sellers only profit when their convictions line-up with negative signals in the option market. The third essay introduces a measure of fear derived from the implied volatility smile. The study examines the relationship between fear and the cross section of option returns. The results show that put options written on stocks with high fear premium outperform put options written on stocks with low fear premium. Fear does not predict the realization of a tail event. This finding confirms the irrational nature of fear.
| Author | : Yigit Atilgan |
| Publisher | : |
| Total Pages | : 196 |
| Release | : 2010 |
| Genre | : Options (Finance) |
| ISBN | : |
Download Essays on the Information Flow from Option Markets to Stock Markets Book in PDF, ePub and Kindle
| Author | : Iskra Kalodera |
| Publisher | : Tectum - Der Wissenschaftsverlag |
| Total Pages | : 116 |
| Release | : 2011-07 |
| Genre | : |
| ISBN | : 9783828889026 |
Download Essays on Stock Options Book in PDF, ePub and Kindle
This book focuses exclusively on stock options, analyzing their pricing, liquidity, and information transmission empirically. With the help of discrete choice modeling and regression analysis, it offers new insights into the behavior of stock option liquidity as well as the influence of overall market liquidity on option prices. Many observed phenomena find explanation through the market microstructure. The book also provides the most comprehensive analysis of equity options for the German market so far and serves as a guide to up-to-date empirical topics for both researchers and practitioners.
| Author | : Mr. Travis Lake Johnson |
| Publisher | : |
| Total Pages | : |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
Download Essays on Information in Options Markets Book in PDF, ePub and Kindle
In the first chapter, my coauthor and I examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket asymmetric information model, equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 0.34% per week (19.3% annualized). Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information. In the second chapter, I show that in many asset pricing models, the equity market's expected return is a time-invariant linear function of its conditional variance, which can be estimated from options markets. However, I show that when the relation between conditional means and variances is state-dependent, an observer requires the combined information in multiple variance horizons to distinguish among the states and thereby reveal the equity risk premium. Empirically, I show that while the VIX by itself has little predictive power for future S & P 500 returns, the VIX term structure predicts next-quarter S & P 500 returns with a 5.2% adjusted R-squared.
| Author | : Jung Hwang |
| Publisher | : |
| Total Pages | : 278 |
| Release | : 2008 |
| Genre | : Portfolio management |
| ISBN | : |
Download Essays on Price Discovery in Stock and Option Markets Book in PDF, ePub and Kindle
| Author | : Cuyler Lawrence Strong |
| Publisher | : |
| Total Pages | : 141 |
| Release | : 2020 |
| Genre | : Options (Finance) |
| ISBN | : |
Download Essays on Single-Stock Futures and Options Markets Book in PDF, ePub and Kindle
These two essays demonstrate the important role that derivative markets play in assimilating information into financial markets. In the first essay I use the 2008 short-selling ban to examine the impact of single-stock futures (SSFs) trading on options market quality. I show that there is a substitution effect between options trading and SSFs trading during the ban period. In addition, my results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks without SSFs, stocks with SSFs were less likely to violate put-call parity during the ban period. My results suggest that SSFs trading helps mitigate the negative effect of the short-selling ban on options market quality documented in the literature.In the second essay I look at information flows through large option trades. The motivation comes from CNBC's "Halftime Report" which regularly covers unusual option activity, i.e., those abnormally large trades, and recommend investors to follow the "smart money". I investigate the impact of the CNBC coverage on underlying stock prices and whether investors can indeed profit by following the "smart money". I document an immediate spike in trading volume and abnormal returns at the time of the CNBC coverage, and evidence that the unusual option trades are informative of stock prices around the coverage. However, I also document a significant reversal in underlying stock prices following the CNBC coverage. Using the same criteria advocated by the CNBC commentators, I identify unusual option activities for a large sample of stocks without CNBC coverage. I confirm that the unusual option trades significantly predict underlying stock returns, but find no evidence of reversal in underlying stock prices. My findings suggest that the CNBC coverage of unusual option activity has a destabilizing effect on underlying stock prices and investors cannot profit by simply following the CNBC reporting on the "smart money".
| Author | : Vincent Campasano |
| Publisher | : |
| Total Pages | : |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
Download Essays on the Term Structure of Volatility and Option Returns Book in PDF, ePub and Kindle
The first essay studies the dynamics of equity option implied volatility and shows that they depend both upon the option's time to maturity (horizon) and slope of the implied volatility term structure for the underlying asset (term struc ture). We propose a simple, illustrative framework which intuitively captures these dynamics. Guided by our framework, we examine a number of volatility trading strategies across horizon, and the extent to which profitability of trading strategies is due to an interaction between term structure and realized volatility. While profitable trading strategies based upon term structure exist for both long and short horizon options, this interaction requires that positions in long horizon options be very different than those required for short horizon options. Equity option returns depend upon both term structure and horizon, but for index options, implied volatility term structure slope negatively predicts returns. While the carry trade has been applied profitably across asset classes and to index v volatility, given this difference in index and equity implied volatility dynamics, I examine the carry trade in the equity volatility market in the second essay. I show that the carry trade in equity volatility produces significant returns, and unlike the returns to carry in other asset classes, is not exposed to liquidity or volatility risks and negatively loads on market risk. A long volatility carry portfolio, after transactions costs, remains significantly profitable and negatively loads on market risks, challenging traditional asset pricing theories. Overwriting an index position with call options creates a portfolio with fixed exposures to market and volatility risk premia. I allow for time-varying allocations to volatility and the market by conditioning on the slope of the implied volatility term structure. I show that a three asset portfolio holding a VIX futures position, the SandP 500 Index and cash triples the returns of the index and more than doubles the risk-adjusted returns of the covered call while maintaining a return volatility roughly equal to that of the SandP 500 Index.
| Author | : Xiaohu Deng |
| Publisher | : |
| Total Pages | : |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
Download Three Essays in Finance Book in PDF, ePub and Kindle
This dissertation presents three papers that examine the real effects of market frictions such as short selling constraints, and also informed trading in put option and short selling markets. Specifically, first two essays examine the positive externalities of short selling, and paper 3 examines the informational patterns of short selling and put option trading and interactions between both trading activities. Essay 1 studies the real effects of short selling constraints on stock prices, and corporate investment. To do so, I exploit world-wide regulatory interventions to permit short selling. I find that reducing short selling constraints causes stock prices and crash risk to drop, and price efficiency to improve. Corporate investment also drops and is accompanied by a drop in debt and equity issues. Investment becomes more responsive to growth opportunities. My results suggest that short selling constraints can alleviate distortions in stock prices and corporate investment. My results are consistent with the notion that stakeholders infer information from stock prices and adjust investment accordingly. Essay 2 examines whether short selling reduces politically motivated bad news hoarding. I examine the stock price behavior of Chinese public firms around two highly visible political events - meetings of the National Congress of the Chinese Communist Party and Two Sessions (The National People’s Congress Conference and The Chinese People’s Political Consultative Conference) from 2002-2014, and find that political bad news hoarding has been reduced after short selling becomes available. I establish causality by relying on a difference-in-differences approach based on a controlled experiment of short selling regulation changes in China. I also find this reduction in bad news hoarding to be more pronounced in firms with stronger politicalconnection (higher state ownership and larger size) and higher accounting opacity, which further confirms our finding. This study sheds new light on the real effects of short sellers on political impact on capital market. Essay 3 identifies the informational patterns of short sales and option trades. Using VAR and calculating Impulse Response Functions, I find that short selling in general contains more information than put option trading, and put option trading has limited substitution effect.
