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Excess returns to buying low options‐volume stocks and selling high options‐volume stocks: Information or characteristics?

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  • Li Cai
  • Jian Du

Abstract

This paper documents a negative relationship between options‐trading volume and stock returns. The relationship is remarkably robust and cannot be explained by existing asset‐pricing theorems. We find that strategies that require buying stocks with low options‐trading volume in the past and selling stocks with high options‐trading volume in the past generate significant positive abnormal returns. Further analysis indicates that the pattern mostly represents a characteristic effect, in which options trading predicts stock returns through its relationship with determinant characteristics such as beta, illiquidity, and idiosyncratic volatility.

Suggested Citation

  • Li Cai & Jian Du, 2018. "Excess returns to buying low options‐volume stocks and selling high options‐volume stocks: Information or characteristics?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1487-1513, December.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:12:p:1487-1513
    DOI: 10.1002/fut.21957
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    References listed on IDEAS

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    Cited by:

    1. Wright, Calvin & Swidler, Steve, 2023. "Abnormal trading volume, news and market efficiency: Evidence from the Jamaica Stock Exchange," Research in International Business and Finance, Elsevier, vol. 64(C).

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