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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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    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. Blau, Benjamin M. & Nguyen, Nga & Whitby, Ryan J., 2014. "The information content of option ratios," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 179-187.
    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.
    3. Hu, Jianfeng, 2014. "Does option trading convey stock price information?," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(3), pages 625-645.

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