Impact of Open Interest and Trading Volume in Option Market on Underlying Cash Market: Empirical Evidence from Indian Equity option Market

Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

“…• To ensure the liquidity of the selected options, only near month options (Mukharjee & Mishra, 2004) having at least one trade on a trading day are selected (Dixit, Yadav, & Jain, 2010). • To avoid the variability in the implied volatility due to over liquidity during the maturing week of options, the contracts are selected with a jump to the next expiration cycle eight days prior to maturity (Srivastava, 2004;Debasish, 2009…”

“…Initial empirical studies on the lead-lag structure of the Indian stock and options market were on non-price variables in the markets. The information content of the trade volume and open interest of stock options were analyzed for price discovery in the Indian context by Srivastava (2004) and Mukharjee and Mishra (2004). Testing the information content of the price predictors developed using both the variables proved that they contained information to predict future price movements in the underlying stocks.…”

“…The Indian evidence is also in support of the findings of the study. Srivastava (2004) and Mukharjee and Mishra (2004) noted the price discovery role of the information content of the trade volume and open interest of stock options, and Debasish (2009) provided that the derivatives markets lead the stock market in India. But the results contradict with Mallikarjunappa and Afzal (2008), Dixit, Yadav, and Jain (2010), Shaik and Padhi (2013; 2015),that provided that the Indian options market measures fail to capture all relevant information for forecasting price movements in the stock market.…”

Relationship between Options Trading Volume and Company Value: Evidence from India

“…Since Ross's (1976) observation, options markets have seen an exponential growth both in number of assets with options listing and in options trading volume. The ever-increasing attractiveness of options market can very well be gauged from the total traded value in options market all over the world, 3 with Indian options market being no exception (see Mukherjee & Mishra, 2004). 4 If options help completing the market (Ross, 1976) and increase informational efficiency (Figlewski & Webb, 1993), agents with private information should be better able to trade on their information (Roll, Schwartz & Subrahmanyam, 2009) and lead others to discover that information.…”

“…Thus, options not only may lead the underlying assets in impounding information but also may provide information that simply cannot be inferred from the underlying assets' markets (Bhuyan & Chaudhury, 2001). Similarly, if the assumptions relating to complete, competitive and frictionless markets (see Cao, 1999) are relaxed, Asia-Pacific Journal of Management Research and Innovation, 9, 2 (2013): [181][182][183][184][185][186][187][188][189][190] introduction of option contracts can affect the prices of underlying assets (Mukherjee & Mishra, 2004). Therefore, if traders with relevant information choose to trade in the options market, not only the option prices and options market activity become relevant in impounding the information and its subsequent discovery, options could, in fact, lead the underlying assets in terms of price change and trading activity.…”