Effects of rollover strategies and information stability on the performance measures in options markets: An examination of the KOSPI 200 index options market (original) (raw)
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Informed trading in the index option market: The case of KOSPI 200 options
Journal of Futures Markets, 2008
This study examines if informed trading is present in the index option market by analyzing the KOSPI 200 options, the most actively traded derivative product in the world. The spread decomposition model developed by is utilized and the adverse-selection cost component of the spread estimated by the model is then used as a proxy for the degree of informed trading. We find that adverse-selection costs constitute a nontrivial portion of the transaction costs in index options trading. Approximately one-third of the spread can be accounted for by information asymmetry costs. A further analysis indicates that adverse-selection costs are positively related with option delta. Our regression analysis shows that option-related variables are significantly associated with estimated information asymmetry costs, even when controlling for proxies for informed trading in the index futures market. Finally, we find the evidence that foreign investors are better informed compared to domestic investors and that domestic institutions have an edge in terms of information over domestic individuals.
Trading in the Options Market Around the Financial Analysts’ Consensus Revision
2012
This article investigates the options market around a revision in the financial analysts' consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately 3 days prior to the announcement. We find this behavior in option-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts' revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.
Technical Report no 191, Department of Statistics, Athens University of Economics and Business, 2002
Degiannakis and Xekalaki (1999) compare the forecasting ability of Autoregressive Conditional Heteroscedastic (ARCH) models using the Correlated Gamma Ratio (CGR) distribution. According to the PEC model selection algorithm, the models with the lowest sum of squared standardized one-step-ahead prediction errors are the most appropriate to exploit future volatility. Based on Engle et al. (1993), an economic criterion to evaluate the PEC model selection algorithm is applied: the cumulative profits of the participants in an options market in pricing one-day index straddle options based on the variance forecasts. An options market consisting of 104 traders is simulated. Each participant applies his/her own variance forecast algorithm to price a straddle on Standard and Poor's 500 (S&P500) index for the next day. Traders who based their selection on the PEC model selection algorithm achieve the highest profits. Thus, the PEC selection method appears to be a tool in guiding one's choice of the appropriate model for estimating future volatility in pricing derivatives.
An empirical comparison of the performance of alternative option pricing models
investigaciones económicas, 2005
This paper presents a comparison of alternative option pricing models based neither on jump-di usion nor stochastic volatility data generating processes. We assume either a smooth volatility function of some previously defined explanatory variables or a model in which discrete-based observations can be employed to estimate both path-dependence volatility and the negative correlation between volatility and underlying returns. Moreover, we also allow for liquidity frictions to recognize that underlying markets may not be fully integrated. The simplest models tend to present a superior out-of sample performance and a better hedging ability, although the model with liquidity costs seems to display better in-sample behavior. However, none of the models seems to be able to capture the rapidly changing distribution of the underlying index return or the net buying pressure characterizing option markets.
The Effects of Option Trading Behavior on Option Prices
Journal of Risk and Financial Management
This paper investigates the relationship between option trading behavior and option pricing patterns. We argue that greater active trading in the options market due to investor overconfidence leads to higher volatility and larger discrepancies in option pricing, which may be captured by implied volatility spread and implied volatility skewness. Using two different measures of excess option trading, we find that trading activities are correlated in different ways with volatility, volatility spread, and volatility skewness. We also find that these relationships exist both over time and cross-sectionally. We suggest that options investors tend to chase “hot” stocks, as we find evidence of a positive relationship between option trading activities and past underlying equity returns. Heavier trading in the options market also tends to make out-of-the-money call options more (less) expensive than the at-the-money counterparts over time (cross-sectionally). Because trading activities do not...
investigaciones …, 2005
This paper presents a comparison of alternative option pricing models based neither on jump-diffusion nor stochastic volatility data generating processes. We assume either a smooth volatility function of some previously defined explanatory variables or a model in which discrete-based observations can be employed to estimate both path-dependence volatility and the negative correlation between volatility and underlying returns. Moreover, we also allow for liquidity frictions to recognize that underlying markets may not be fully integrated. The simplest models tend to present a superior out-of sample performance and a better hedging ability, although the model with liquidity costs seems to display better in-sample behavior. However, none of the models seems to be able to capture the rapidly changing distribution of the underlying index return or the net buying pressure characterizing option markets.
Options on Thinly Traded Stocks: Theory and Empirical Evidence
Canadian Journal of Administrative Sciences / Revue Canadienne des Sciences de l'Administration, 2009
7% study is an application of the bounding methodology in the evaluation of option pricing on Canadian financial markets. Options are evaluated on the basis of their return distribution, which is assumed to follow a model where price increases and decreases are rare events. Parameters of the distribution are estimated from a sample drawn from daily trading statistics of the TSE, including all intra-day trades and quotes. These parameters for each stock are then used to calculate the option bounds and to compare these both to simultaneously observed market prices and to calculated Black-Scholes values. Rgsumk Cette Ctude est une application de la mkthode des bornes duns I'ivaluation du prix des options sur actions duns les marchb financiers canadiens. Ces options sont Cvahies sur la buse d'hypothbes concernant la distribution de leurs rendements, qui est supposCe suivre un modde OM les changements de prix a la hausse OM a la baisse sont des CvCnements rares. L.es parambres de cette distribution sont estimb ci partir d i m Cchantillon alkatoire de journCes dbpiration de la bourse de Toronto, OM les donnkes contiennent toutes les transactions de la journCe. Ces paramdres sont ensuite utilisks pour calculer les bornes et les comparer aux prix rialisis duns le marchk, ainsi qu hux valeurs Black-Scholes. Although widely used in practice, the Black-Scholes (1973) option pricing model (OPM) has long been observed to suffer from systematic biases. Studies by Ball and Torous (1985), MacBeth and Melville (1980), and Philips and Smith (1980) have reported these biases, and several explanations have been offered. One of the most frequently mentioned is the OPM's assumption of lognormally distributed returns. Indeed, the continuous time stochastic process used in the model can only be an approximation to the "true" stock return distribution, given that trades and stock price changes are discrete, both as events and in amounts. The Cox, Ross, and Rubinstein (1979) (CRR) binomial model, a discrete-time generalization of the OPM that converges to it at the continuous time limit, cannot explain the observed biases. For this The authors gratefully acknowledge the funding of this research by the Social Sciences and Humanities Research Council of Canada, and the provision of the database at normnal expense by the Toronto Stock Exchange They would also like to express their appreciahon to Jean Lefoll for several helpful comments, to Tony Quon for h s advice on stahstical problems, and to two anonymous referees for their detailed analysis of the manuscnpt and numerous comments helpful in clanfying the exposition
Trading in the Options Market around Financial Analysts’ Consensus Revisions
Journal of Financial and Quantitative Analysis, 2014
This article investigates the options market around a revision in the financial analysts' consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately 3 days prior to the announcement. We find this behavior in option-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts' revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.