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The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements

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  • Mayhew, Stewart
  • Sarin, Atulya
  • Shastri, Kuldeep

Abstract

The authors examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. They find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks but option spreads increased. Overall, the authors' results indicate that uninformed traders are more sensitive to the margin dimension of trading costs. Copyright 1995 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 5 (December)
Pages: 1635-53

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Handle: RePEc:bla:jfinan:v:50:y:1995:i:5:p:1635-53

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Cited by:
  1. Chen, Carl R. & Diltz, J. David & Huang, Ying & Lung, Peter P., 2011. "Stock and option market divergence in the presence of noisy information," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2001-2020, August.
  2. Santa-Clara, Pedro & Saretto, Alessio, 2004. "Option Strategies: Good Deals and Margin Calls," University of California at Los Angeles, Anderson Graduate School of Management qt0499w44p, Anderson Graduate School of Management, UCLA.
  3. Rafiqul Bhuyan, 2002. "Information, Alternative Markets, and Security Price Processes: A Survey of Literature," Finance 0211002, EconWPA.
  4. Fahlenbrach, Rudiger & Sandas, Patrik, 2005. "Market Frictions and Seemingly Anomalous Co-movements of Index Options and Index Futures Quotes," Working Paper Series 2005-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  5. Aragon, George O. & Spencer Martin, J., 2012. "A unique view of hedge fund derivatives usage: Safeguard or speculation?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 436-456.
  6. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
  7. Bronka Rzepkowski, 2003. "Order Flows, Delta Hedging and Exchange Rate Dynamics," Working Papers 2003-18, CEPII research center.
  8. Lecce, Steven & Lepone, Andrew & McKenzie, Michael D. & Segara, Reuben, 2012. "The impact of naked short selling on the securities lending and equity market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 81-107.
  9. Chang, Chuang-Chang & Hsieh, Pei-Fang & Lai, Hung-Neng, 2009. "Do informed option investors predict stock returns? Evidence from the Taiwan stock exchange," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 757-764, April.
  10. Faff, Robert & Hillier, David, 2005. "Complete markets, informed trading and equity option introductions," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1359-1384, June.
  11. Chang, Chuang-Chang & Hsieh, Pei-Fang & Tang, Chih-Wei & Wang, Yaw-Huei, 2013. "The intraday behavior of information misreaction across various categories of investors in the Taiwan options market," Journal of Financial Markets, Elsevier, vol. 16(2), pages 362-385.
  12. Ghulam Sarwar, 2004. "The informational role of option trading volume in the S&P 500 futures options markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(16), pages 1197-1210.
  13. Alejandro Bernales & Massimo Guidolin, 2013. "The Effects of Information Asymmetries on the Success of Stock Option Listings," Working Papers 484, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Jun Pan & Allen Poteshman, 2004. "The Information of Option Volume for Future Stock Prices," NBER Working Papers 10925, National Bureau of Economic Research, Inc.
  15. Ghulam Sarwar, 2005. "The Informational Role of Option Trading Volume in Equity Index Options Markets," Review of Quantitative Finance and Accounting, Springer, vol. 24(2), pages 159-176, January.
  16. Podolski, Edward J. & Truong, Cameron & Veeraraghavan, Madhu, 2013. "Informed options trading prior to takeovers – Does the regulatory environment matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 286-305.
  17. Chen, Carl R. & Lung, Peter P. & Tay, Nicholas S. P., 2005. "Information flow between the stock and option markets: Where do informed traders trade?," Review of Financial Economics, Elsevier, vol. 14(1), pages 1-23.
  18. Anderson, Ronald C. & Reeb, David M. & Zhang, Yuzhao & Zhao, Wanli, 2013. "The efficacy of regulatory intervention: Evidence from the distribution of informed option trading," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4337-4352.
  19. Chang, Chuang-Chang & Hsieh, Pei-Fang & Lai, Hung-Neng, 2013. "The price impact of options and futures volume in after-hours stock market trading," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 984-1007.

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