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Informed Trading around Stock Split Announcements: Evidence from the Option Market

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  • Gharghori, Philip
  • Maberly, Edwin D.
  • Nguyen, Annette

Abstract

Prior research shows that splitting firms earn positive abnormal returns and that they experience an increase in stock return volatility. By examining option-implied volatility, we assess option traders’ perceptions on return and volatility changes arising from stock splits. We find that they do expect higher volatility following splits. There is only weak evidence, though, of option traders anticipating an abnormal increase in stock prices. We also show that our option measures can predict both stock volatility levels and changes after the announcement. However, there is little evidence that they can predict the returns of splitting firms.

Suggested Citation

  • Gharghori, Philip & Maberly, Edwin D. & Nguyen, Annette, 2017. "Informed Trading around Stock Split Announcements: Evidence from the Option Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 705-735, April.
  • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:02:p:705-735_00
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    Cited by:

    1. Siddiqi, Hammad, 2015. "Anchoring and Adjustment Heuristic: A Unified Explanation for Equity Puzzles," MPRA Paper 68729, University Library of Munich, Germany.
    2. Siddiqi, Hammad, 2015. "Anchoring Heuristic and the Equity Premium Puzzle," MPRA Paper 68537, University Library of Munich, Germany.
    3. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.
    4. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    5. Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    6. Hammad, Siddiqi, 2015. "Capital Asset Pricing Model Adjusted for Anchoring," MPRA Paper 67668, University Library of Munich, Germany.
    7. Patel, Vinay & Putniņš, Tālis J. & Michayluk, David & Foley, Sean, 2020. "Price discovery in stock and options markets," Journal of Financial Markets, Elsevier, vol. 47(C).
    8. Chan, Konan & Li, Fengfei & Lin, Ji-Chai & Lin, Tse-Chun, 2017. "What do stock price levels tell us about the firms?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 34-50.
    9. Siddiqi, Hammad, 2016. "Anchoring and Adjustment Heuristic: A Unified Explanation for Asset-Return Puzzles," Risk and Sustainable Management Group Working Papers 229607, University of Queensland, School of Economics.
    10. Siddiqi, Hammad, 2015. "Anchoring Adjusted Capital Asset Pricing Model," Risk and Sustainable Management Group Working Papers 211224, University of Queensland, School of Economics.
    11. S. Amir Tabibian & Zhaoyong Zhang & Mohsen Jafarian, 2020. "How Does Split Announcement Affect Stock Liquidity? Evidence from Bursa Malaysia," Risks, MDPI, Open Access Journal, vol. 8(3), pages 1-14, August.
    12. Ryu, Doojin & Yang, Heejin, 2019. "Who has volatility information in the index options market?," Finance Research Letters, Elsevier, vol. 30(C), pages 266-270.
    13. Ihsan Badshah & Hardjo Koerniadi & James Kolari, 2019. "Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(4), pages 1-11, November.
    14. Scott Fung & Robert Loveland, 2020. "When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1459-1485, October.
    15. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    16. Hammad, Siddiqi, 2015. "Anchoring Adjusted Capital Asset Pricing Model," MPRA Paper 67403, University Library of Munich, Germany.
    17. Kam F. Chan & Philip Gray, 2018. "Volatility jumps and macroeconomic news announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 881-897, August.

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