Index Option Trading Activity and Market Returns

2020 ◽  
Author(s):  
Tarun Chordia ◽  
Alexander Kurov ◽  
Dmitriy Muravyev ◽  
Avanidhar Subrahmanyam
Keyword(s):  
Investor Sentiment ◽  
Options Markets ◽  
Market Returns ◽  
Option Trading ◽  
Market Makers ◽  
Macroeconomic Announcements ◽  
Retail Investors ◽  
Protection Strategies ◽  
Risk Protection ◽  
Index Option

Do order flows in index derivatives play an informational role? Weekly index put order flow on the International Securities Exchange positively and robustly predicts weekly S&P 500 index returns. This result obtains mainly for net put buying and is stronger in high VIX periods and in periods following macroeconomic announcements. We explore rationales for our findings, which include investor sentiment, the notion that market makers trade on information in options markets, and option-based risk protection strategies used by retail investors. The last explanation accords best with our analysis. This paper was accepted by Tyler Shumway, finance.

Who Offers Liquidity on Options Markets when Volatility is High?

2012 ◽  
Vol 15 (04) ◽  
pp. 1250021 ◽  
Author(s):  
Matthew C. Chang ◽  
Chung-Fern Wu
Keyword(s):  
Option Price ◽  
Stock Index ◽  
Order Book ◽  
Options Markets ◽  
Option Markets ◽  
Market Makers ◽  
Liquidity Provision ◽  
Professional Market ◽  
Index Option ◽  
The Relationship

In this paper, we investigate the relationship between volatility of and liquidity provision through the aggregation of high-frequency data on the stock index option markets of Taiwan. Strong evidence shows the different behaviors of liquidity supply for market makers and nonmarket makers. In addition, evidence demonstrates that nonmarket makers are unwilling to offer liquidity on buy-side when option price is high, but the phenomena are not evident for the market makers. Overall, nonmarket makers provide less liquidity when volatility is high. In contrast, market makers provide the same or more liquidity on the limit order book when volatility is high. Therefore, the market makers play more important a role when market is volatile. The policy implication is that professional market makers on option markets are stable forces to offer liquidity when market is volatile, and it is referable for those pure order-driven option markets without market makers (e.g., Korea Exchange, KRX).

Investor sentiment antecedents

2019 ◽  
Vol 11 (1) ◽  
pp. 36-54 ◽  
Author(s):  
Ranjan Dasgupta ◽  
Rashmi Singh
Keyword(s):  
Decision Making ◽  
Stock Market ◽  
Emerging Market ◽  
Investment Decision ◽  
Investor Sentiment ◽  
Equation Modeling ◽  
Content Type ◽  
Investment Decision Making ◽  
Retail Investors ◽  
Specific Factors

PurposeThe determinants of investor sentiment based on stock market proxies are found in numbers in empirical studies. However, investor sentiment antecedents developed from primary survey measures by constructing an investor sentiment index (ISI) are not done till date. The purpose of this paper is to fill this research gap by first developing an ISI for the Indian retail investors and then examining the investor-specific, stock market-specific, macroeconomic and policy-specific factors’ individual impact on the investor sentiment.Design/methodology/approachFirst, the authors develop the ISI by using the mean scores of six statements as formulated based on popular direct investor sentiment surveys undertaken throughout the world. Then, the authors employ the structural equation modeling approach on the responses of 576 respondents on 40 statements (representing the index and four study hypotheses) collected in 2016 across the country.FindingsThe results show that investor- and stock market-specific factors are the major antecedents of investor sentiment for these investors. However, interestingly macroeconomic fundamentals and policy-specific factors have no role to play in driving their sentiment to invest in the stock market.Practical implicationsThe major implication of the results is that the Indian retail investors are showing a mixed approach of Bayesian and behavioral finance decision making. So, these implications can guide the investment consultants, regulators, other stakeholders in markets and overwhelmingly the retail investors to introspect their investment decision making across time horizons.Originality/valueThe formulation of ISI in an emerging market context and thereafter examining possible antecedents to influence retail investors in their investment decision making are not done till date. So, the study is unique in its research issue and findings and will have significant implication for the retail investors at least in emerging market contexts.

scholarly journals Investor Sentiment In The Financial Market: A Survey

2021 ◽  
Author(s):  
Charles A. Aziegbemhin
Keyword(s):  
Neural Networks ◽  
Risk Management ◽  
Financial Market ◽  
Investor Sentiment ◽  
Management Tool ◽  
Market Behavior ◽  
Market Returns ◽  
Wide Acceptance ◽  
Comprehensive Survey ◽  
Alternative Markets

Many techniques like technical analysis, fundamental analysis, neural networks etc are used to forecast market behavior but none of these methods has been consistently acceptable forecasting tool. This thesis surveys more than 200 related published articles that study investor sentiment techniques as derived and applied to forecasting equity, debt and alternative markets. From the literatures, it shows that the application of investor sentiment for evaluating market behavior is gaining wide acceptance. Changes in investor sentiment can trigger changes in the valuation and pricing of assets, therefore offering the ability to forecasting market directions more accurately than other techniques. This study is the most comprehensive survey on investor sentiment techniques and its impact on forecasting a panel of assets in the equity, debt, derivative and other alternative investment markets. It examines forecasting as it affects sentiment, investor sentiment, it influence on market returns, news analytics and its use as profit and risk management tool.

Small investors’ internet sentiment and return predictability

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Antti Klemola
Keyword(s):  
Investor Sentiment ◽  
Equity Market ◽  
Individual Investors ◽  
Linear Regression Models ◽  
Internet Search ◽  
Search Activity ◽  
Market Returns ◽  
Content Type ◽  
Vector Autoregressive ◽  
Bear Market

Purpose The purpose of this paper is to propose a novel and new direct measurement of small investor sentiment in the equity market. The sentiment is based on the individual investors’ internet search activity. Design/methodology/approach The author measures unexpected changes in the small investor sentiment with AR (1) process, where the residuals capture the unexpected changes in small investor sentiment. The author employs vector autoregressive, Granger causality and linear regression models to estimate the association between the unexpected changes in small investor sentiment and future equity market returns. Findings An unexpected increase in the search popularity of the term bear market is negatively associated with the following week’s equity market returns. An unexpected increase in the spread (the difference in popularities between a bull market and a bear market) is positively associated with the following week’s equity market returns. The author finds that these effects are stronger for small-sized companies. Originality/value By author’s knowledge, the paper is the first that measures the small investor sentiment that is based on the internet search activity for keywords used in the American Association of Individual Investor’s (AAII) survey questions. The paper proposes an alternative small investor sentiment measure that captures the changes in small investor sentiment in more timely fashion than the AAII survey.

Googling Investor Sentiment around the World

2019 ◽  
Vol 55 (2) ◽  
pp. 549-580 ◽  
Author(s):  
Zhenyu Gao ◽  
Haohan Ren ◽  
Bohui Zhang
Keyword(s):  
Stock Prices ◽  
Stock Markets ◽  
Investor Sentiment ◽  
Search Behavior ◽  
Market Returns ◽  
Country Level ◽  
The World ◽  
Google Search

We study how investor sentiment affects stock prices around the world. Relying on households’ Google search behavior, we construct a weekly measure of sentiment for 38 countries during 2004–2014. We validate the sentiment index in tests using sports outcomes and show that the sentiment measure is a contrarian predictor of country-level market returns. Furthermore, we document an important role of global sentiment in stock markets.

scholarly journals Estimating portfolio risk for tail risk protection strategies

2020 ◽  
Vol 26 (4) ◽  
pp. 1107-1146
Author(s):  
David Happersberger ◽  
Harald Lohre ◽  
Ingmar Nolte
Keyword(s):  
Portfolio Risk ◽  
Tail Risk ◽  
Protection Strategies ◽  
Risk Protection

scholarly journals Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

2012 ◽  
Vol 47 (4) ◽  
pp. 715-741 ◽  
Author(s):  
Henk Berkman ◽  
Paul D. Koch ◽  
Laura Tuttle ◽  
Ying Jenny Zhang
Keyword(s):  
Transaction Costs ◽  
Investor Sentiment ◽  
Strong Tendency ◽  
Retail Investors ◽  
Hidden Cost ◽  
Retail Investor ◽  
Implicit Transaction Costs

AbstractWe find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. It is concentrated among stocks that have recently attracted the attention of retail investors, it is more pronounced for stocks that are difficult to value and costly to arbitrage, and it is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high-attention stocks near the open frequently exceed the effective half spread.

scholarly journals A Study of the Performance of Option Strategy Benchmark Index in Global Option Markets

2021 ◽  
Vol 50 (4) ◽  
pp. 439-472
Author(s):  
Byung Jin Kang ◽  
Cheoljun Eom ◽  
Woo Baik Lee ◽  
Uk Chang ◽  
Jong Won Park
Keyword(s):  
Emerging Markets ◽  
Trading Strategies ◽  
Options Markets ◽  
Option Markets ◽  
Option Trading ◽  
Significant Difference ◽  
Sample Data ◽  
Covered Call ◽  
Almost All ◽  
The Empirical Analysis

While most previous studies have analyzed the performance of the Option Strategy Benchmark Index (SBI) in a specific market such as S&P500 and KOSPI200, this study comprehensively investigates the performance of the option SBIs in nine global options markets in Europe, Asia, and Oceania. In the empirical analysis using the sample data from September 2008 to April 2019, the main results of this study are as follows. First, most of the option SBIs generally provide better performance than the simple buy-and-hold strategy, which is mainly due to a reduction in risk rather than improvement in returns. Second, the option SBIs based on straddle or protective put, one of the most popular option trading strategies, perform poorly in almost all markets, whereas the option SBIs based on covered call or (cash) covered put show relatively good performance. Finally, there is no significant difference in the performance of the option SBIs between markets in the same region or those with a similar level of development. However, we found significant differences in the performance of the option SBIs between Europe and Asia and developed and emerging markets.

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