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The option to stock volume ratio and future returns

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  • Johnson, Travis L.
  • So, Eric C.
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    Abstract

    We 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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12000797
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 2 ()
    Pages: 262-286

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:262-286

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Short-sale costs; Options; Trading volume; Return predictability;

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    References

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    Cited by:
    1. Hu, Jianfeng, 2014. "Does option trading convey stock price information?," Journal of Financial Economics, Elsevier, vol. 111(3), pages 625-645.
    2. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.

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