Do informed option investors predict stock returns? Evidence from the Taiwan stock exchange

The intraday behavior of information misreaction across various categories of investors in the Taiwan options market

“…6 The Taiwan options market is typical of Asian or emerging financial markets, in which individual investors are the majority of traders and the dynamic of market prices is largely influenced by foreign capital flows. Chang, Hsieh, and Lai (2009) Several studies report the existence of certain sophisticated investors who are capable of making profits in either the Taiwan stock or options markets (e.g., Barber, Lee, Liu, and Odean 2007;Mahani and Poteshman, 2008;Chang, Hsieh, and Lai, 2009;Han, Lee, and Yu, 2010).…”

Information Content of Options Trading Volume for Future Volatility: Evidence from the Taiwan Options Market

“…For example, using datasets containing comprehensive transaction records, Pan and Poteshman (2006) and Chang et al (2009) show that the transactions of different categories of option traders reveal varying degrees of directional information, whilst Ni et al (2008) find that the trading volume of non-market makers contains volatility information. 2 To the best of our knowledge, no study has yet utilized the complete transaction records of an options market to investigate which category of option traders (domestic institutional traders, foreign institutional traders or individuals) possess volatility 1 See Canina and Figlewski (1993), Jorion (1995), Fleming (1998), Blair et al (2001), Poon and Granger (2003), Pong et al (2004), Jiang and Tian (2005), Doran et al (2007), Konstantinidi et al (2008) and Bedendo and Hodges (2009).…”

“…(2009) and Chang et al (2009) demonstrate that the Taiwan capital market is largely influenced by inflows from foreign institutional investors, who reportedly earn money in the Taiwan stock market, and possess directional information in the Taiwan option market. 6 It therefore seems quite natural to ask whether foreign institutional investors in the Taiwan options market also possess such information with regard to volatility.…”

“…In addition to trading on volatility information, informed traders may also tend to trade on directional information in the options market (Pan and Poteshman, 2006;Chang et al, 2009). We therefore control for the potential impact of directional information trades on future volatility through the variable AD t -j , which is the absolute difference between the sum of the delta-weighted long volume and the sum of the delta-weighted short volume at time t -j , with the delta being computed in a similar way to the Black-Scholes vega.…”

Are Investment Strategies Exploiting Option Investor Sentiment Profitable? Evidence from Japan

“…Several studies have analyzed the PCR in the US as a sentiment indicator of stock markets: see, for example, Billingsley and Chance (1988), Pan and Poteshman (2006), and Chang et al (2009). (Note 1) However, in Japan, we are not aware of any prior research using the PCR.…”