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Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

Author

Listed:
  • David Easley

    (Department of Economics, Cornell University,)

  • Maureen O'Hara

    (Johnson Graduate School of Management, Cornell University,)

  • P.S. Srinivas

    (The World Bank)

Abstract

This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets. We show conditions under which informed traders trade options, and we investigate the implications of this for the linkage between markets. Our model predicts an important informational role for the volume of particular types of option trades. We empirically test our model's hypotheses with intraday option data. Our main empirical result is that negative and positive option volumes contain information about future stock prices. Copyright The American Finance Association 1998.

Suggested Citation

  • David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, April.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:2:p:431-465
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