Next Article in Journal
Nonparametric Econometric Methods and Applications
Previous Article in Journal
Encouraging Entrepreneurship and Economic Growth
Previous Article in Special Issue
Correcting the Bias in the Practitioner Black-Scholes Method
Open AccessArticle

Testing the Information-Based Trading Hypothesis in the Option Market: Evidence from Share Repurchases

1
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. View Full-Text
Keywords: event study; informed trading; options; share repurchase; volatility spread; US equity market event study; informed trading; options; share repurchase; volatility spread; US equity market
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.

Show more citation formats Show less citations formats
Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Article Access Map by Country/Region

1
Back to TopTop