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Options Trading and Stock Price Informativeness

Published online by Cambridge University Press:  05 April 2023

Jie Cao ,
Amit Goyal Open the ORCID record for Amit Goyal [Opens in a new window] ,
Sai Ke  and
Xintong Zhan Open the ORCID record for Xintong Zhan [Opens in a new window]
Jie Cao
Affiliation:
Hong Kong Polytechnic University School of Accounting and Finance jie.cao@polyu.edu.hk
Amit Goyal
Affiliation:
University of Lausanne Swiss Finance Institute amit.goyal@unil.ch
Sai Ke
Affiliation:
University of Mississippi School of Business saike.fina@gmail.com
Xintong Zhan*
Affiliation:
Fudan University School of Management
*
xintongzhan@fudan.edu.cn (corresponding author)
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Abstract

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We document the causal effects of single-name options trading on the absolute level of information content of prices (stock price informativeness) by exploiting the Penny Pilot Program as an exogenous shock to options trading volume. We find that options trading increases underlying stock price informativeness and information acquisition by both option and stock investors, consistent with the framework of Goldstein and Yang (2015). The findings are driven by firms for which options are more important sources of information and firms with more efficiently priced options. Options market introduction in a sample of 25 other economies also leads to higher price informativeness.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 4 , June 2024 , pp. 1516 - 1540
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Snehal Banerjee, Ji-Woong Chung, Jennifer Conrad (the editor), Olivier Dessaint, Jianfeng Hu, Wenxi Jiang, Dmitriy Muravyev, Maureen O’Hara, Neil Pearson, Yaxuan Qi, Alessio Saretto, Valeri Sokolovski, Tianyu Wang, Jing Xie, seminar participants at Korean Securities Association, Hong Kong Polytechnic University, National University of Singapore, University of Brisbane, and University of New South Wales, and participants at the Canadian Derivatives Institute (CDI) 2018 Annual Conference, the 2022 China International Conference in Finance (CICF), Finance Down Under 2020 Conference, the SFS Cavalcade Asia-Pacific 2019 Annual Conference, and Western Finance Association (WFA) 2019 Annual Meeting for helpful comments. The work was supported by the Research Grant Council of the Hong Kong Special Administrative Region, China (Project Nos. GRF 14500919, 14501720, and 14500621). Xintong Zhan gratefully acknowledges the financial support from the National Natural Science Foundation of China (Grant No. 72271061). We are grateful for research assistance from Yaojia (Zoe) Zhang. All errors are our own.

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