Price Discovery and Information Asymmetry in Equity and Commodity Futures Options Markets

This dissertation contributes to the existing literature by examining trading behaviour around security-level and market-wide events. The research focuses on equity and futures options and continues by providing insights into the price discovery process of futures and options in commodity markets. The first essay examines informed options trading around a sample of 352 Food and Drug Administration announcements from 166 United States (US)-listed firms between 1996 and 2016. Using implied volatility (IV) spreads and options trading volume as proxies for informed trading, it is found that informed traders are aware of the timing of the upcoming announcement at least five days in advance and at least some informed traders have knowledge of the finer details that affect the price impact of the announcement. These findings have implications for regulators, investors and relevant firms. The second essay analyses the behaviour of United States (US) commodity futures and options IV-based measures as proxies for information leakage around macro-economic and commodity-specific news announcements between 2007 and 2017. In the three days preceding news releases, abnormal changes in the levels of futures options IV spreads and skew were reported. In addition, a statistically significant relationship between announcement date returns and abnormal changes in pre-announcement IV spreads and skew were reported. Universally, the findings indicate that at least some investors are informed about the price impact of the upcoming news announcements in seven commodity markets. The third essay investigates the extent of the importance of commodity futures or options markets in the price discovery process in the six most-actively traded markets: crude oil, natural gas, gold, silver, corn and soybeans. Using new information and leadership techniques, new evidence has reported that, in recent times, both markets make a meaningful contribution to price discovery. However, on average, options lead futures in reflecting new information for most of these commodities. In addition, it was found that increased speculation—rather than hedging activity—in commodity derivatives is a key determinant of price discovery in the options markets. The fourth essay sheds light on high versus low-frequency (LF) liquidity measures in times of information asymmetry. Market microstructure data availability has significantly improved and it is now possible to estimate liquidity measures at the nanosecond level. However, this level of data are not available in all markets and time periods and there is a significant cost and computational burden of high-frequency (HF) data. Goyenko et al. (2009) and Fong et al. (2017) show that various LF liquidity measures can proxy for HF benchmarks and show that the results are robust across countries and time. However, liquidity measures do not always behave in the expected fashion during periods of information asymmetry (Collin-Dufresne & Fos, 2015). Drawing from Ball and Brown (1968), an event study methodology is used to investigate whether the LF measures of liquidity can proxy for HF measures around earnings announcements (i.e., periods of information asymmetry). It was found that the closing-percent-quoted-spread is the best proxy for the percent–cost HF benchmarks. In contrast, using cross-sectional, portfolio and individual time-series correlations, the most consistent LF proxies are the high-low impact and closing-percent-quoted-spread impact. However, the performance of these proxies weakens in the pre- and post-announcement periods around the earnings announcement.