Trading Volume Lead/Lag Relations Between the ASX and ASX Option Market: Implications of Market Microstructure

Abstract

This study documents the mtraday lead/lag relatIOn between tradmg volumes of stocks and Mock optIOns traded on the ASX and ASX OptIOns Market respectively. A stock lead of up to 15 mmutes IS IflltwUy documented. Differences m mtraday lead/lag relatIOns may occur because of the different nature of eqUitles and optIOns as mstruments of mvestment, or market microstructure differences, or both these factors The study fmds no eVidence that tradzng on przvate mformatzon causes the optIOn market to lead. Instead, market l1ucrostructure differences mduce relatively mfrequent tradzng m optIOn markets and consequently cause stocks to lead SpeCifically, we flfld the stock lead IS ellllllnated when only perIOds of frequent trading are exammed. Also, the lI1frequent trading lI1duced stock lead IS partly explalfled by the different opemng procedures of the two markets

High frequency lead/lag relationships — Empirical facts

“…63.6%) of cases on average for TOTF.PA (resp. ESSI.PA), which is much better than a random forecast 16 . As a result, being able to trade at the mid price yields a profitable strategy with an average return of 0.4 (resp.…”

“…In this section, we investigate what are the common features of leading assets. It is often claimed in the literature [7,8,14,16,17,18,19,20,21] that the most liquid assets tend to be leaders, which sounds intuitive because it should take more time to illiquid assets to incorporate information into prices.…”

The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk*

“…Easley et al (1998) show that price changes in stock markets lead option volumes with a lag of 20-30 min, whereas option volumes affect stock price changes more rapidly. Jarnecic (1999) shows that stock volumes on the ASX lead option volumes on the ASX options market. Cairney and Swisher (2004) represent one of few studies which analyze informed trading in options markets on a lowerfrequency basis, showing abnormal volume in Chicago Board Options Exchange (CBOE) options for three days before earnings announcements.…”

Price discovery in the U.S. stock and stock options markets: A portfolio approach

“…Early studies, e.g., Manaster and Rendleman Jr. (1982) and Bhattacharya (1987) find that options market leads the underlying asset market in revealing information, but more recent studies, e.g., Stephan and Whaley (1990), Chan, Chung, and Johnson (1993), Easley, O'Hara, and Srinivas (1998), Jarnecic (1999), Chan, Chung, and Fong (2002) and Chakravarty, Gulen, and Mayhew (2004), have essentially reversed the conclusion.…”