No abstract

We study the effect of investor sentiment on the relation between the option to stock volume ratio (O/S) and future stock returns. Relative option volume has return predictability under short sale constraints. For this reason, we expect and find a stronger O/S‐return relation during high sentiment periods than during low sentiment periods. We find that Baker and Wurgler's Investor Sentiment Index affects the O/S‐return relation after controlling for consumer sentiment indices and economic environment factors. While prior studies have used consumer sentiment indices as alternative measures of investor sentiment, our results suggest these effects are distinct.

No abstract

This research studies the effect of stock-level investor sentiment on individual stock returns’ mean-variance relation. Using unique buy and sell volume data of retail investors in Korean stock market, we find that a positive mean-variance relation is undermined among high-sentiment stocks, but holds among low-sentiment stocks. We adopt buy-sell imbalances of retail investors for individual stocks as a measure of stock-level investor sentiment. Further, our findings provide empirical evidence of a strong riskreturn trade-off among stocks with low retail concentration (e.g., large capitalization, high-priced, and growth stocks). Existing research only analyzes market-wide investor sentiment. However, we study the effect of stock-level investor sentiment on individual stock returns. Therefore, our findings suggest novel implications about the investment strategy that the stock-level investor sentiment is important when constructing portfolios based on variance.

This study investigates the cross‐sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one‐way information transmission from options markets to stock markets by adopting well‐known option‐implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long‐term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short‐term components. Our findings indicate that the inter‐market information asymmetry rapidly disappears before the expiration of long‐term option contracts.

Previous research highlights the importance of two distinct types of informed trading in the options market: trading on the price direction of underlying stocks, and trading on their uncertainty. Surprisingly, however, the studies considering these in a unified framework are scant. This study attempts to fill the gap. We predict that when both directional and volatility information could motivate options trading, the return predictability of options volume hinges on the shape of the volatility smirk. Consistent with this prediction, we find that the negative relationship between options volume and future stock returns is concentrated in stocks exhibiting steep volatility smirks. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:1053–1093, 2017

This paper uses a unique data set of institutional investors' equity and equity option holdings to investigate how their investment horizons are associated with option trading and its information content. Firms with more short-term investors have more active option markets relative to stock markets. Also, they have a greater proportion of option trading volume ascribed to high-leveraged contracts. Furthermore, both abnormal option trading before earnings announcements and informativeness of option market statistics are more pronounced when short-term investors predominate. These findings suggest that short-term institutions trade leveraged contracts actively to exploit information, thus effecting price discovery in option markets.

No abstract