Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases
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Department of Finance, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand
2
Department of Finance, Texas A&M University, College Station, TX 77843-4218, USA
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2019, 12(4), 179; https://doi.org/10.3390/jrfm12040179
Received: 5 October 2019 / Revised: 25 November 2019 / Accepted: 28 November 2019 / Published: 29 November 2019
(This article belongs to the Special Issue Option Pricing)
The informed options trading hypothesis posits that option prices lead stock prices. In this paper, we extended the research on this hypothesis to open-market share repurchases. Empirical tests showed that the implied volatility spread was not significantly related to buy-and-hold abnormal stock returns. However, further evidence reveal a significant relationship between implied volatility spread and subsequent stock return volatility around open-market share repurchase events. We concluded that option traders have private information on the volatility of stock returns and superior information processing ability that accounts for prescient pricing behavior in options relative to stocks.
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Keywords:
event study; informed trading; options; share repurchase; volatility spread; US equity market
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited
MDPI and ACS Style
Badshah, I.; Koerniadi, H.; Kolari, J. Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases. J. Risk Financial Manag. 2019, 12, 179. https://doi.org/10.3390/jrfm12040179
AMA Style
Badshah I, Koerniadi H, Kolari J. Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases. Journal of Risk and Financial Management. 2019; 12(4):179. https://doi.org/10.3390/jrfm12040179
Chicago/Turabian StyleBadshah, Ihsan; Koerniadi, Hardjo; Kolari, James. 2019. "Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases" J. Risk Financial Manag. 12, no. 4: 179. https://doi.org/10.3390/jrfm12040179
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