pp.567-611. Contents

This paper measures the impact of option introductions on the return variance of underlying stocks. Past research generally finds a significant reduction in stock return variance following the listing of options through 1986. Using a more extensive sample, I compare changes in the return variance of optioned stocks to changes in the return variance of a control group. Since the average change in the control group is statistically indistinguishable from the average change in the optioned stocks, I conclude that option introductions do not significantly affect stock return variance. JEL classification: G18. Key words: option listing, derivatives. Current Version: November 1997 1 A Note on the Impact of Options on Stock Return Volatility The recent spectacle of derivatives-related lawsuits and bankruptcies has recharged the debate regarding derivatives regulation. One popular question is whether derivatives affect the volatility of related markets. Past research, focusing prim...

This paper presents a study of intra-day patterns of stock market activity and introduces duration based activity measures for single stocks and multiple assets. The proposed measures involve weighted durations, i.e. times necessary to sell (buy) a predetermined volume or value of stocks. As such, they capture dependencies between intra-trade durations, transaction volumes and prices, and can be interpreted as liquidity measures. This approach allows us to highlight the intra-day variations of liquidity, its costs and volatility, and to develop a liquidity based asset ordering. The extension to a multivariate analysis yields new insights into the dynamics of portfolio liquidity by revealing various aspects of asset substitution, including the effects of correlated trade intensities of portfolio components. Several examples are used to show that in practice, the proposed liquidity measures become efficient instruments for strategic block trading and optimal portfolio adjustments. The pap...

remaining errors are our responsibility alone. 0 The Informational Content of Option Volume Prior to Takeovers This paper examines informed trading in the options versus the stock market prior to takeover announcements. Prior to an announcement, the percentage increase in call volume for target firms is roughly four times as large as the increase in stock volume. Moreover, preannouncement option volume is the heaviest in those takeover targets that experience the highest announcement-day returns. Short-term out-of-the-money calls experience the largest increase in buy-side trading, suggesting that the activity is dominated by those who are relatively certain an announcement will occur soon. We also use volume-triggered trading rules to further assess the relationship between call volume and future returns as well as the profitability of option trading prior to takeovers. Trading profits are increasing in the amount of call volume required to trigger a buy signal. However, similar trading rules using stock volume reveal no such patterns. When these trading rules are applied to all firms with options listed on the CBOE, large increases in call-option trading are again followed by higher subsequent returns. Our results indicate that between the options and the stock markets, informed investors prefer to trade on the former market. Thus, the options market is more conducive to information and price discovery. 1 1

Please do not quote without permission * Chidambaran is visiting at NYU, on leave from Tulane. Lee holds joint appointments at Tulane and HKUST. Trigueros is at Tulane. We are grateful for the comments from participants at seminars at Tulane

This paper analyzes the intraday interdependence of price movements and order flows for actively traded NYSE stocks and their CBOE-traded options. Stock net-buy volume (buyer-initiated volume minus seller-initiated volume) has strong predictive ability for subsequent stock and option returns, but call or put net-buy volume has little predictive ability. Furthermore, stock returns lead option returns more than they lag even after controlling for net-buy volume. Therefore, our results indicate that order flows in the stock market are informative but order flows in the option market are not, and suggest that informed investors submit trades primarily in the stock market rather than in the option market. There is also some evidence for the non-informational linkage between the two markets. Stock net-buy volume is positively (negatively) related to lagged call (put) returns, suggesting that option dealers dynamically hedge their outstanding short option positions when the option deltas chan...

R. Stoll Market microstructure deals with the purest form of financial intermediation-- the trading of a financial asset, such as a stock or a bond. In a trading market, assets are not transformed but are simply transferred from one investor to another. The field of market microstructure studies the cost of trading securities and the impact of trading costs on the short-run behavior of securities prices. Costs are reflected in the bid-ask spread (and related measures) and in commissions. The focus of this chapter is on the determinants of the spread rather than on commissions. After an introduction to markets, traders and the trading process, I review the theory of the bid-ask spread in section II and examine the implications of the spread for the short run behavior of prices in section III. In section IV, the empirical evidence on the magnitude and nature of trading costs is summarized, and inferences are drawn about the importance of various sources of the spread. Price impacts of trading from block trades, from herding or from other sources, are considered in section V. Issues in the design of a trading market, such as the functioning of call versus

this paper, we examine the impact of market activity on the percentage bid-ask spreads of S&P 100 index options using transaction data. We propose a new market microstructure theory called a derivative hedge theory, in which option market percentage spreads will be inversely related to the option market maker's ability to hedge his positions in the underlying market, as measured by the liquidity of this underlying market. In a perfect hedge world, spreads arise from the illiquidity of the underlying market, rather than from inventory risk or informed trading in the option market itself.

This paper addresses the question of how an informed trader’s propensity to trade on inside information in a given company’s stock varies with firm and industry characteristics. I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. Privately informed traders decide whether to trade in the stock of the firm at which the information event occurred or in the stock of a competing firm. The model predicts that informed traders may have incentives to make information-based trades in the stocks of competing firms, especially when events occur at firms with large market shares. In the context of 921 quarterly earnings announcements in 136 industries, I use intraday transactions data to empirically test the hypothesis that net order flow and returns in the stocks of nonannouncing competing firms have information content for announcing firms. I find evidence of cross-stock order flow and returns relationships that are consistent with the predictions of the model.

This paper presents empirical results examining the influence of the Mexican peso, the Brazilian real, and the Hungarian forint futures contracts on the respective spot markets. While measures of linear dependence and feedback indicate strong connections between the respective markets, futures volatility does not significantly explain spot market volatility, nor does it increase after futures introductions. To account for the characteristics of the spot and futures returns, a SWARCH model is employed to estimate volatility. [JEL C22, G15]