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Information content of order imbalance in the index options market

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  • Sensoy, Ahmet
  • Omole, John

Abstract

We use proprietary transaction level data of Borsa Istanbul to compute the order imbalance of index options in order to investigate the linkages between option trades and spot index returns. Our findings show that weeks with higher call (put) order imbalance are associated with higher (lower) contemporaneous spot index returns. In addition, higher call order imbalance significantly predicts negative next-week index returns. The spot index return predictability by call options is absorbed neither by the stock order imbalance nor the index futures imbalance. Indeed, this predictability is consistent with the view that the hedging demand of counterparties in the option market that leads to the transfer of order imbalance from option market to stock market is the driver of predictability. Results are robust after controlling for various factors.

Suggested Citation

  • Sensoy, Ahmet & Omole, John, 2022. "Information content of order imbalance in the index options market," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 418-432.
    • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:418-432
    DOI: 10.1016/j.iref.2021.11.006
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    More about this item

    Keywords

    Derivatives; Index options; Order imbalance; Informed trading; Delta hedging; Borsa Istanbul;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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