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The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements

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  • Mayhew, Stewart
  • Sarin, Atulya
  • Shastri, Kuldeep

Abstract

The authors examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. They find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks but option spreads increased. Overall, the authors' results indicate that uninformed traders are more sensitive to the margin dimension of trading costs. Copyright 1995 by American Finance Association.

Suggested Citation

  • Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    • Handle: RePEc:bla:jfinan:v:50:y:1995:i:5:p:1635-53
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