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Informed trading in S&P index options? Evidence from the 2008 financial crisis

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  • Li, Wei-Xuan
  • French, Joseph J.
  • Chen, Clara Chia-Sheng

Abstract

This study examines the presence of informed trading in S&P 500 index (SPX) options surrounding the 2008 financial crisis. Adverse selection costs are estimated using three spread decomposition models and used as proxies of informed trading. We show that adverse selection costs are economically significant and substantially increase after the onset of the crisis. For example, adverse selection costs increased by an average of $0.962 ($0.884) for call (put) options using estimates from the model of George et al. (1991). When trading with superior information, informed traders prefer options that are near-the-money, of medium maturity (30–90 days), and of low price volatility. Further analysis reveals that information asymmetry costs are positively associated with trade size and negatively associated with trading intensity.

Suggested Citation

  • Li, Wei-Xuan & French, Joseph J. & Chen, Clara Chia-Sheng, 2017. "Informed trading in S&P index options? Evidence from the 2008 financial crisis," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 40-65.
    • Handle: RePEc:eee:empfin:v:42:y:2017:i:c:p:40-65
    DOI: 10.1016/j.jempfin.2017.01.001
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    Cited by:

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    4. Jongho Kang & Jangkoo Kang & Jaeram Lee, 2022. "Who and what drives informed options trading after the market opens?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 338-364, March.
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    More about this item

    Keywords

    G01; G14; G19; S&P 500 Index (SPX) Options; Market microstructure; Adverse selection; Information asymmetry; Informed trading;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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