Does options trading convey information on futures prices?

William T. Lin, Shih Chuan Tsai, Zhenlong Zheng, Shuai Qiao

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper studies the presence of informed trading in Taiwan stock index options (TXO) and analyzes the informational role of foreign institutions in incorporating information into Taiwan stock index futures (TX). We have found that only the option-induced part (OOI) of the total TX order imbalance can predict future TX prices, and the OOI calculated from open-buy TXO, defined by Ni et al. (2008), provides incremental predictability. This finding shows that the price predictability stems from the information flow resulting from option transactions rather than from liquidity pressure. We conclude further that option transactions from foreign institutions provide the most significant predictability, out-of-the-money option transactions in particular. These empirical results show that option transactions conducted by foreign institutions have played the primary role in conveying the information inherent in the TXO market to the TX market, foreign institutions being delta-informed traders. Retail investors, the major players in both the TXO and TX markets, have done almost nothing of significance with regard to TXO information transmission into the TX market, with the exception of some near-the-money and out-of-the-money options.

Original languageEnglish
Pages (from-to)182-196
Number of pages15
JournalNorth American Journal of Economics and Finance
Volume39
DOIs
Publication statusPublished - 2017 Jan 1

    Fingerprint

Keywords

  • Foreign institutions
  • Information transmission
  • Option volume
  • Order imbalance
  • Price predictability

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this