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Detecting Informed Trading Activities in the Options Markets

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Author Info

  • Marc CHESNEY

    (University of Zurich and Swiss Finance Institute)

  • Remo CRAMERI

    (University of Zurich and Swiss Finance Institute (Ph.D Program))

  • Loriano MANCINI

    (Geneva Finance Research Institute and FINRISK)

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    Abstract

    We develop statistical methods to detect informed trading in options markets. We apply these methods to 31 companies from various sectors over 14 years analyzing approximately 9.6 million option prices. We find that option informed trading tends to cluster prior to certain events, takes place more in put than call options, generates easily large gains exceeding millions, is not contemporaneously reflected in the underlying stock price, involves around the money options during calm times and out-of-the-money options during turbulent times. These findings are not driven by false discoveries in informed trades which are controlled using multiple hypothesis testing techniques.

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    Bibliographic Info

    Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-42.

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    Length: 57 pages
    Date of creation:
    Date of revision:
    Handle: RePEc:chf:rpseri:rp1142

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    Web page: http://www.SwissFinanceInstitute.ch
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    Related research

    Keywords: Options Trades; Open Interest; Informed trading; False Discovery Rate;

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