put call parity violations and return predictability evidence from the 2008 short sale ban abstract we investigate the link between stock and options markets during the 2008 u s short sale ban first we find definitive evidence that the ban indeed caused stock overvaluation second we show that the short sale ban caused a significant increase in put call parity violations only in the direction of the short sale constraints and it significantly enhanced the stock return predictability of put call parity violations third the overvaluation is really large a portfolio formed on the trading signal that the put call parity violation is in the top quintile underperforms the lowest quintile portfolio by a statistically and economically significant abnormal daily return of 5 6 during the short sale ban period we employ a novel and rigorous method of using taq intraday data to ensure that our high low violation arbitrage portfolio as well as the five fama french factors used to estimate the abnormal returns are implementable by a hypothetical investor exempt from the shorting ban

volatility spread and stock market response to earnings announcements abstract using a broad sample of earnings announcements we find a monotonic increase in the spread between call and put implied volatilities as it gets closer to the earnings announcement date the steady build up of volatility spread in the days leading up to the announcement date coupled with the predictive power of cumulative abnormal implied volatility spread on subsequent announcement returns suggests that informed traders are the driving force behind the option market activities prior to earnings announcements such informed trading as proxied by the abnormal implied volatility spread increases rather than decreases the stock market response to earnings announcements after controlling for an array of firm and announcement characteristics this effect is most pronounced when the pre earnings option trading volume is heightened overall our findings lend strong support to the notion that informed options trading immediately before earnings announcements helps alleviate the stock market under reaction to earnings announcements and make it closer to a complete response

monetary policy regimes expected inflation and the response of interest rates to money announcements this paper examines the response of the term structure of interest rates to weekly money announcements estimated responses for both the pre and post october 1979 periods are first presented then two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared with the estimated responses both hypotheses are found to be consistent with the responses but they have sharply different implications about the federal reserve s short run monetary policy by exploiting these different implications additional empirical results focusing directly on the money stock process support the policy anticipations hypothesis

demand for gasoline in kuwait an empirical analysis using cointegration techniques abstract this paper estimates the demand for gasoline in kuwait for the period 1970 1989 using a cointegration and error correction model ecm it is found that gasoline demand is inelastic with respect to price in the short and long run and while it is elastic in the long run gasoline demand is inelastic with respect to income in the short run this suggests that gasoline demand response to income changes is higher in the long run than in the short run furthermore gasoline consumption adjusts towards its long run level with about 52 of the adjustment occurring in the first year

the interrelation of stock and options market trading volume data this research empirically investigates the relation between common stock and call option trading volumes the paper hyothesizes and tests a sequential flow of information between the stock and option markets if information trading for cboe listed firms is predominantly accomplished through option trading then existing research methodologies may be biased against finding any significant economic consequences in those instances where option listing is an important variable results indicate that trading in call options leads trading in the underlying shares with a one day lag black 2 suggests that information traders may prefer trading in options rather than shares due to economic incentives provided by reduced transaction costs capital requirements and trading restrictions and due to the greater action afforded by option trading manaster and rendleman 12 empirically support black s 2 option information trading preference finding incremental information content in option prices up to twenty four hours prior to its reflection in stock prices jennings and starks 10 report that the stock price adjustment process upon arrival of new information differs for those firms listed on the chicago board option exchange cboe and they demonstrate that stock price adjustment to new information occurs more rapidly for firms with listed call options the results in both papers appear to warrant consideration of an optiontrading variable in the design of empirical tests both manaster and rendleman 12 and jennings and starks 10 investigate the price relation between shares and call options this paper investigates trading volume copeland 4 posits the use of trading volume as a proxy for the rate of information arrival he concludes that the relation between absolute value of price changes and volume is positive and linear if one accepts a sequentialinformation arrival hypothesis as valid the present research hypothesizes and tests a sequential flow of information between the stock and option markets analyses presented are based on econometric tests for causality1 derived from the works of granger 6 and sims 22 if information trading takes place

energy consumption real income and temporal causality results from a multi country study based on cointegration and error correction modelling techniques abstract unlike previous studies on the causal relationship between energy consumption and economic growth this paper illustrates how the finding of cointegration i e long term equilibrium relationship between these variables may be used in testing granger causality based on the most recent johansen s multivariate cointegration tests preceded by various unit root or non stationarity tests we test for cointegration between total energy consumption and real income of six asian economies india pakistan malaysia singapore indonesia and the philippines non rejection of cointegration between variables rules out granger non causality and imples at least one way of granger causality either unidirectional or bidirectionial secondly by using a dynamic vector error correction model we then analyse the direction of granger causation and hence the within sample granger exogeneity or endogeneity of each of the variables thirdly the relative strength of the causality is gauged through the dynamic variance decomposition technique by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period into proportions attributable to shocks in the other variables including its own in the bivariate system results based on these tools of methodology indicate that while all pair wise relationships shared common univariate integrational properties only relationships for three countries india pakistan and indonesia were cointegrated for these countries temporal causality results were mixed with unidirectional causality from energy to income for india exactly the reverse for indonesia and mutual causality for pakistan the vdcs were not inconsistent with these results and provided us with an additional insight as to the relatively more dominant direction of causation in pakistan simple bivariate vector autoregressive models for the three non cointegrated systems did not indicate any direction of causality significantly in either direction

option listing and stock returns abstract this article examines the effect of option introductions on the underlying stocks in addition to the price increase and volatility decrease that take place when new options are listed we obtain and explain the following new empirical results i an increase in the value of the market around the listing dates of new options ii an increase in the value of an industry index which excludes the optioned stocks iii the dissipation of the price and volatility effects in recent periods and iv the existence of an announcement effect in one subperiod of our sample and its dissipation in recent periods

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

asymmetric information and options in an extension of the kyle 1985 model of continuous insider trading it is shown that asymmetric information can make it impossible to price options by arbitrage even when an option would appear to be redundant its introduction into the market can cause the volatility of the underlying asset to become stochastic this eliminates the potential for dynamically replicating the option the change in the price process of the asset reflects a change in the information transmitted by volume and prices when the option is traded article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

potential biases from using only trade prices of related securities on different exchanges a comment equilibrium prices of the underlying stocks using daily trade prices this paper points out that a bias associated with the bid ask spread and nonsynchronous trading may create the impression that option prices contain information not reflected in the contemporaneous stock prices even during times when the two prices are in equilibrium the mr methodology is described in section i and the potential biases arising due to the bid ask bounce and the non synchroneity of stock and option prices are illustrated in section ii following an observation in their paper that the stock prices implied by the option prices are smaller than the corresponding stock prices only thirty seven percent of the time section iii looks at the distribution of trade prices relative to the last quoted bid ask prices for both stocks and options many more during the day option trades occur at the ask than at the bid whereas the distribution is approximately symmetric for stocks a likely implication is that the option trade prices and therefore the implied stock prices are upward biased estimates of the corresponding true prices this bias increases at day end for both stocks and options

world transport energy demand modelling methodology and elasticities abstract this paper presents the international energy agency s iea approach of modelling transport energy demand fuel demand which is not a demand per se is derived whenever possible from the economic activity in the transport sector and not estimated directly ie using one equation or simultaneous equation system in general the transport models employ a two step approach in the first step transport activity the sector s relevant energy service is estimated econometrically in the second step the transport activity projections are then combined with estimates of efficiency improvements car turnover rates and diesel gasoline penetration assumptions in order to arrive at projections of fuel demand the principal advantages of this approach are that the relevant energy services are modelled and that for model simulation efficiency improvements can be dealt with explicitly the effectiveness of economic instruments is a function of the reaction of consumers and businesses to income and price changes an in depth understanding of income and price elasticities of transport demand and transport energy demand is important in order to be able to assess the effectiveness of policies considered the paper also shows the underlying long term income and price elasticities for oecd and non oecd regions

the impact of trading floor closure on market efficiency evidence from the toronto stock exchange we are the first to evaluate the impact of the trading floor closure on the corresponding efficiency of the stock price formation process on the toronto stock exchange tsx utilizing short horizon return predictability as an inverse indicator of market efficiency we demonstrate that while the switch to all electronic trading resulted in higher volume and lower trading costs the information asymmetry among investors increased as more informed and uninformed traders entered the market the tsx trading floor closure resulted in a significant decrease in informational efficiency and it took about six years for efficiency to return to its pre all electronic trading level in multivariate setting we provide evidence that changes in information asymmetry and increased losses to liquidity demanders due to adverse selection account for the largest variations in the deterioration of the aggregate level of informational efficiency our results suggest that electronic trading should complement rather than replace the exchange trading floor

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

volatility uncertainty time decay and option bid ask spreads in an incomplete market this paper documents the fact that in options markets the percentage implied volatility bid ask spread increases at an increasing rate as the option s maturity date approaches to explain this stylized fact this paper provides a market microstructure model for the bid ask spread in options markets we first construct a static equilibrium model to illustrate the aforementioned phenomenon where risk averse and competitive option market makers quote bid and ask prices to minimize their inventory risk in an incomplete market with both directional and volatility risk we extend this model to multiperiods and show that the same phenomenon occurs there as well two new implications are generated a volatility level effect and a volatility variance effect these implications are empirically tested and the empirical results confirm the model s validity finally we document the importance of detrending the maturity effect by showing that the detrended percentage volatility spread explains future jump intensit

digital options and efficiency in experimental asset markets abstract in asset markets extraordinary price run ups bubbles followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy leading to inefficient resource allocation and underinvestment conversely derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset we combine these observations and test experimentally whether digital options a type of derivative that has recently been introduced to a wider audience via online prediction markets can reduce price bubbles in a laboratory setting we find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result

monetary anticipations and the demand for money abstract it has recently been argued that unanticipated changes in nominal money supply should affect the real demand for money and empirical results which appear to support this hypothesis have been presented unfortunately the econometric techniques used by previous authors yield severel biased estimates in this paper we show how valid estimates may easily be obtained and present some illustrative empirical results using u s data these results do not support the conclusions of earlier authors we find that unanticipated money supply changes do indeed affect the real demand for money but with the wrong sign and that anticipated changes also have a significant effect a consistency test for all models employing the anticipated unanticipated distinction is also proposed

why does the option to stock volume ratio predict stock returns we use data on signed option volume to study which components of option volume predict stock returns and resolve the seemingly inconsistent results in the literature we find no evidence that trades related to synthetic short positions in the underlying stocks contain more information than trades related to synthetic long positions purchases of calls that open new positions are the strongest predictor of returns followed by call sales that close out existing purchased call positions overall our results indicate that the role of options in providing embedded leverage is the most important channel why option trading predicts stock returns

synthetic or real the equilibrium effects of credit default swaps on bond markets we provide a model of nonredundant credit default swaps cdss building on the observation that cdss have lower trading costs than bonds cds introduction involves a trade off it crowds out existing demand for the bond but improves the bond allocation by allowing long term investors to become levered basis traders and absorb more of the bond supply we characterize conditions under which cds introduction raises bond prices the model predicts a negative cds bond basis as well as turnover and price impact patterns that are consistent with empirical evidence we also show that a ban on naked cdss can raise borrowing costs

forecast and analysis of demand for petroleum products in india this paper analyses the demand for petroleum products in india for this purpose econometric models based on time series data are generated for individual products so as to capture product specific factors affecting demand the models generated follow the non homothetic translog functional form the models are validated against historical data by testing them for ex post forecast accuracy demand forecasts till the year 2010 are obtained for the various petroleum products using these models the forecasts indicate a high rate of growth in demand for motor gasoline high speed diesel oil kerosene liquid petroleum gas and aviation turbine fuel however the demand for fuel oils light diesel oil naphtha and lube oils is expected to grow at a relatively lower rate to arrive at an optimal refinery process configuration an analysis of alternative means of satisfying the demand which include product import options and domestic refining options with alternative process configurations need to be done thus investment plans for augmenting domestic refining capacity will have to take into account the future pattern of demand to arrive at an optimal product mix forecasting demand forms a crucial aspect in the overall policy analysis of the oil and gas sector

the price effect of option introduction this paper examines the price effect of option introduction from 1974 to 1980 the introduction of individual options causes a permanent price increase in the underlying security beginning approximately three days before introduction the price effect appears to be associated with introduction and not announcement throughout the sample period excess returns volatility declines with option introduction systematic risk is unchanged there is a positive relation between the price increase and a measure of activity in the options market copyright 1989 by american finance association

stealth trading in options markets we investigate how price discovery occurs in the options markets through traders trade size choice by employing transactions data on all options traded on a sample of 100 firms we show that informed traders fragment their orders into small medium trades for low high volume contracts we also find that almost 60 of the price discovery occurs in the exchange with the largest market share for a given option where informed traders favor medium size trades upon examining distinct option series for a given stock we find that at the money calls display the highest information share

the future of uk final user energy demand anticipation of final user energy demand is central to suppliers and policy makers plans recent developments in dynamic econometrics such as the cointegration approach have enabled energy modellers to study long run relationships between demand and its determinants principally economic activity and real prices the purpose of this paper is to present the seecem output elasticity estimates and forecasts using the cointegration approach as well as the methodology and analysis underlying them as economic activity is expected to grow in all but the iron and steel sector the long run relationships indicate that most sectors will increase overall fuel use up to the year 2000 despite weak but potentially volatile world oil prices and given stable environmental policies average real oil prices should remain broadly constant except in the transport sector economic activity elasticities and increased competition in supply industries imply that natural gas and electricity are likely to take an increasing share of final user requirements at the expense of petroleum products and coal this gradual and continued shift towards cleaner fuels is likely to ameliorate adverse environmental consequences resulting from the overall growth in final user fuel demand

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

a characterization of the daily and intraday behavior of returns on options the daily and intraday behavior of returns on chicago board options exchange options is examined option returns contain systematic patterns even after adjusting for patterns in the means and variances of the underlying assets this is consistent with the hypothesis that informed trading in options can make the order flow in the options market informative about the value of the underlying asset making options nonredundant the intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and discretionary liquidity traders this paper examines the daily and intraday behavior of returns on options we have two goals our first objective is to identify systematic patterns in the means and variances of daily and intraday returns on options our second objective is to decompose option returns into patterns that are related to the means and variances of the underlying stocks and by inference those patterns that are independent of patterns in the means and variances of the underlying assets 1 our work is important for a number of reasons first options have become as important as common stocks yet there is no detailed investigation of the behavior of returns on options second it is important to identify similarities and differences in return patterns across different securities and market structures an understanding of these similarities and differences would allow us to develop better models of returns that capture these properties closely related to this it is instructive to examine option returns in light of the partial equilibrium models we use to value them specifically are the return patterns in options driven exclusively by the underlying stocks or do option returns contain patterns of their own identifying independent yet similar patterns in options returns may lead to an identification of factors that are common across two different market structures the new york

why option prices lag stock prices a trading based explanation while many studies find that option prices lead stock prices stephan and wvhaley 1990 find that stocks lead options we find no evidence that options even deep out of the money options lead stocks after confirming stephan and whaley s results we show their results can be explained as spurious leads induced by infrequent trading of options we show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices hence we find no evidence of arbitrage opportunities associated with the stock lead in a perfect market price discrepancies should be instantly arbitraged away in particular option prices should neither lead nor lag stock prices in real markets only very short leads should occur traders with private information who are confident that their information is valid and that they will not be detected generally want highly leveraged positions to exploit their advantage thus we might expect options with their greater leverage to lead stocks if information trading is important manaster and rendleman 1982 bhattacharya 1987 and anthony 1988 find evidence that options

energy models for demand forecasting a review abstract energy is vital for sustainable development of any nation be it social economic or environment in the past decade energy consumption has increased exponentially globally energy management is crucial for the future economic prosperity and environmental security energy is linked to industrial production agricultural output health access to water population education quality of life etc energy demand management is required for proper allocation of the available resources during the last decade several new techniques are being used for energy demand management to accurately predict the future energy needs in this paper an attempt is made to review the various energy demand forecasting models traditional methods such as time series regression econometric arima as well as soft computing techniques such as fuzzy logic genetic algorithm and neural networks are being extensively used for demand side management support vector regression ant colony and particle swarm optimization are new techniques being adopted for energy demand forecasting bottom up models such as markal and leap are also being used at the national and regional level for energy demand management

modelling energy demand of developing countries are the specific features adequately captured abstract this paper critically reviews existing energy demand forecasting methodologies highlighting the methodological diversities and developments over the past four decades in order to investigate whether the existing energy demand models are appropriate for capturing the specific features of developing countries the study finds that two types of approaches econometric and end use accounting are commonly used in the existing energy demand models although energy demand models have greatly evolved since the early seventies key issues such as the poor rich and urban rural divides traditional energy resources and differentiation between commercial and non commercial energy commodities are often poorly reflected in these models while the end use energy accounting models with detailed sectoral representations produce more realistic projections as compared to the econometric models they still suffer from huge data deficiencies especially in developing countries development and maintenance of more detailed energy databases further development of models to better reflect developing country context and institutionalizing the modelling capacity in developing countries are the key requirements for energy demand modelling to deliver richer and more reliable input to policy formulation in developing countries

tax and spend or spend and tax an inquiry into the turkish budgetary process for resolving the budget deficit problem some economists have advocated spending cuts while others support either tax increases or tax cuts this paper investigates the interrelationship between the two fiscal variables for turkey using bivariate and multivariate cointegrating models the engle granger and johansen tests consistently support the existence of one nonzero cointegrating vector representing a stable long run relationship between government spending and revenues in turkey furthermore the multivariate error correction model suggests that taxes unidirectionally granger cause negative changes in spending in accordance with the buchananwagner hypothesis thus from the perspective of policy making and the deficit solution debate raising taxes in turkey is perhaps the optimal solution to the current budget deficit predicament contemporary economies perhaps without exception have been plagued with huge and escalating government budget deficits these deficits are expected to have adverse economic consequences including high real interest rates slow capital formation and high unemployment rates moreover to the extent that the deficit is financed through the issuance of government bonds the recurrent large deficits have further worsened the public debt problem which threatens the well being of numerous countries both developed and developing therefore researchers and policymakers have expended enormous efforts attempting to analyze the deficit problem and to suggest ways to resolve it some for example advocate cuts in government spending rather than tax increases as the optimal solution to the deficit dilemma they reason that governments often spend all that they receive in taxes and perhaps much more under this line of reasoning raising taxes would simply induce more spending leaving the deficit unchanged or even higher others however deny this implied tax and spend nexus and argue that it is taxes that adjust gradually to spending under this latter scenario tax increases will not lead to higher spending and thus could be used as an effective deficit cutting measure along with spending cuts still other researchers posit that changes in spending and taxes could occur simultaneously therefore focusing on one component of the government budget while ignoring the interdependence with the other component would have an ambiguous overall effect on the deficit

empirical assessment of the determinants of road energy demand in greece this paper attempts to cast light on the determinants of road energy demand in greece for this purpose we used cointegration techniques and vector autoregression var analysis in order to capture short run and long run dynamics for gasoline and diesel demand respectively from the empirical analysis that covers the period 1978 2003 we find that in the long run gasoline energy demand appears to be price and income inelastic while diesel demand appears to be price inelastic and income elastic we also found that the absence of close substitutes in the road sector denotes the low level of energy switching in greece

is there price discovery in equity options abstract we use tick by tick quote data for 39 liquid us stocks and options on them and we focus on events when the two markets disagree about the stock price in the sense that the option implied stock price obtained from the put call parity relation is inconsistent with the actual stock price option market quotes adjust to eliminate the disagreement while the stock market quotes behave normally as if there were no disagreement the disagreement events are typically precipitated by stock price movements and display signed option volume in the direction that tends to eliminate the disagreements these results show that option price quotes do not contain economically significant information about future stock prices beyond what is already reflected in current stock prices i e no economically significant price discovery occurs in the option market we also find no option market price discovery using a much larger sample of disagreement events based on a weaker definition of a disagreement which verifies that the findings for the primary sample are not due to unusual or unrepresentative market behavior during the put call parity violations

the informational role of stock and option volume this article analyzes the intraday interdependence of order flows and price movements for actively traded nyse stocks and their chicago board options exchange cboe traded options stock net trade volume buyer initiated volume minus seller initiated volume has strong predictive ability for stock and option quote revisions but option net trade volume has no incremental predictive ability this suggests that informed investors initiate trades in the stock market but not in the option market on the other hand both stock and option quote revisions have predictive ability for each other thus while information in the stock market is contained in both quote revisions and trades information in the option market is contained only in quote revisions copyright 2002 oxford university press

a general equilibrium analysis of option and stock market interactions the traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations this paper demonstrates that when the market is incomplete primary and derivative asset markets generically interact the valuation of derivative and primary security prices depend on the contractual characteristics of the derivative assets available in a version of the mossin mean variance model the authors analyze an equilibrium in which a call option derivative asset is traded and the equilibrium stock price primary asset increases when the options market is opened copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

exogeneity and the export led growth hypothesis the case of china during the past two decades many empirical studies such as balassa 3 4 emery 7 fajana 11 feder 12 maizels 21 rams 22 23 tyler 26 voivodas 27 williamson 28 and others have found that exports promote economic growth in all of these studies a real output growth variable is regressed on either i export levels ii export shares or iii export growth by using a single equation model the statistical significance of the positive coefficient of the export variables has then been interpreted as evidence supporting the export led growth hypothesis chow 6 hsiao 16 and jung and marshall 17 have recently questioned the validity of the above findings this is because the single equation or so called impact studies using ols regression are from an econometric perspective mostly inadequate in addressing the issue of causality if a bidirectional causality between these two variables exports and output exists the estimation and tests used in the impact studies are inconsistent these concerns have subsequently generated a series of new empirical work aimed directly at resolving the issue of causality between exports and output growth 1 2 14 20 the granger 15 causality tests carried out in these studies have revealed that the causal direction in general depends on the country and commodity group under consideration notwithstanding the important contributions of the above mentioned causality studies there are shortcomings that must be dealt with to permit a better understanding of the subject matter first the impact studies presume that the export variable is exogenous this is a rather restrictive assumption as a feedback from output to exports is very likely 17 20 second the existing causality gtudies do not make a clear distinction between exogeneity and causality as suggested by engle hendry and richard 10 hereinafter ehr causality tests such as the granger 15 method are valid only for testing one component of strong exogeneity because they are concerned with sequential marginalizing feedback effects rather than contemporaneous conditioning

options resilience during extreme volatility evidence from the market events of may 2010 abstract using intraday trades and quotes data we study the stock options market before during and after the market events of may 6 2010 focusing on the s p 500 and s p 100 stock options we explore if the options market provided any discernible signals that forewarned the extreme volatility on that day and whether the recovery was fast and without a permanent impact we find that the options market reacted to the volatility rather than predicting it and almost all of the variables are indistinguishable from their previous levels in the next few trading days intraday empirical analysis suggests that most of the impact was over within a few hours from the peak of market volatility

financial markets with trade on risk and return in this paper i develop a model in which risk averse investors possess private information regarding both a stock s expected payoff and its risk these investors trade in the stock and a derivative whose payoff is driven by the stock s risk in equilibrium the derivative is used to speculate on the stock s risk and to hedge against adverse fluctuations in the stock s risk i analyze the derivative price and variance risk premium that arise in this equilibrium and their predictive power for stock returns finally i examine the relationship between prices and trading volume in the stock and derivative received july 31 2017 editorial decision december 3 2018 by editor stijn van nieuwerburgh authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

a direct test of methods for inferring trade direction from intra day data this study directly tests the ability of several competing methods to identify market buy and sell orders using intra day quote and trade prices and identifies factors that affect the accuracy of the methods lee and ready s 1991 algorithm performs about the same as the tick test but the performance of both methods is worse than expected the results show that the use of either algorithm to classify trades can lead to significantly biased estimates of effective spreads and signed volume but the tick test provides better estimates of effective spreads and signed volume than lee and ready s method i introduction the use of intra day prices in empirical studies of securities markets is increasingly common and studies frequently require trades be identified as buyer or seller initiated unfortunately most data sets do not identify trade direction methods have however been proposed that allow trade direction to be inferred from adjacent prices and quotes the accuracy of these methods and the implica tions for microstructure research are still unresolved issues in large part because trade direction is unobservable in most financial data sets this study directly tests the ability of several competing methods to iden tify market buy and sell orders using intra day quote and trade prices the tests are conducted using the torq database a unique data set the new york stock exchange makes available to researchers that contains information on trades quotes and orders using the tick tests and lee and ready s lr hereafter 1991 method to classify trades as buys or sells and comparing the results to the direction of the actual orders i directly test the accuracy of the classification algorithms the tests also identify the factors that affect the accuracy of the clas sification methods additional tests demonstrate that using these algorithms can lead to biased inferences in two of their most common applications estimating effective spreads and signed volume trading test results also show that the tick

stock and option market divergence in the presence of noisy information we examine market behavior of the stock and option markets upon the arrival of noisy information in the form of cnbc s mad money recommendations if stock and option markets are not equally efficient they should respond differently to noisy information with the less efficient market more susceptible to noise we find that the stock market is less efficient than the option market the abnormal difference between option implied and actual stock returns is negative and significant upon exposure to noisy information this difference may yield an economically significant monthly trading profit of up to 5 we conclude that the stock market is more susceptible to noisy information than the option market and is therefore less efficient published by elsevier b v

demand for commercial energy in the state of kerala india an econometric analysis with medium range projections abstract rapid growth in the demand for commercial energy in kerala a state in india posed serious development constraints in the recent past the crucial issue of managing this demand will be of great importance in formulating the future development policy of the state this study analyses the requirement of three major forms of commercial energy in the state of kerala viz electricity petroleum products and coal sectorwise productwise econometric demand models are generated using regression method the primary regression models consisting of statistically significant key energy indicators have been fitted with ordinary least squares ols estimation models wherever required have been subsequently refined in the second stage computations by employing cochrane orcutt transformation algorithm to remove the effects of auto correlation the accuracy of the models have been checked using standard statistical techniques and validated against the past data by testing for expost forecast accuracy employing the models medium range projections of demand of the state for commercial energy till the year 2020 have been made the policy implications and related key issues have been addressed the study identifies the urgent need for special attention in evolving effective energy policies to alleviate an energy famine in the near future

pricing credit default swaps with option implied volatility using the industry benchmark creditgrades model to analyze credit default swap cds spreads across a large number of companies during the 2007 09 credit crisis the authors demonstrate that the performance of the model can be significantly improved by calibrating it with option implied volatility rather than with historical volatility moreover the advantage of using option implied volatility is greater among companies with more volatile cds spreads more actively traded options and lower credit ratings

policy regime changes and monetary expectations testing for super exogeneity abstract the super exogeneity status for weekly u s monetary expectations structure is examined the incomplete structure of the proposed model requires the use of an incidental parameter which is approximated by a linear function of certain instruments a super exogeneity test within the instrumental variables framework examines whether distributional changes stemming from the regime shifts affect the error correction parameter in the expectations structure under the assumption that the variance of the error correction term is constant the data evidence is found to reject super exogeneity

energy demand and environmental taxes the case of greece the purpose of this paper is to analyze the effects that energy taxes may have on reducing environmental pollution in greece we study the demand for residential energy for the period 1965 1998 and on the basis of these estimates we make forecasts for co2 emissions in the coming years furthermore we develop alternative scenarios for tax changes and study their effects on co2 emissions according to our findings the harmonization of the greek energy taxes to the average european union levels implies an increase of total co2 emissions by 6 annually if taxes are raised however to the highest european union levels the co2 emissions are restricted significantly these empirical findings may indicate that environmental taxation cannot be the unique instrument for combating pollution

insider trading stock return volatility and the option market s pricing of the information content of insider trading abstract we find strong evidence that net insider selling is positively associated with future stock return volatility consistent with insider selling increasing outside investors uncertainty the positive effect of net insider selling is significantly stronger when the volatility is measured around the earnings announcement apparently option prices do not fully reflect the information content of insider trading for future volatility more specifically we find no evidence that option traders adjust the implied volatility for the insider trading effect in a timely manner consequently net insider selling is significantly associated with future option straddle returns and delta neutral returns

short run long run and cross elasticities of gasoline demand in brazil gasoline is one of the most important of the oil derived products its importance is closely related to its participation in the value of imports of many countries and in a number of cases it is one of the determinants of their balance of payment deficit fiscal deficit and economic growth as opposed to most nations brazil has had a gasoline substitute since 1985 alcohol many studies have tried to estimate the income and price elasticities of the demand for gasoline in several countries this paper extends previous studies by estimating the cross price elasticity between gasoline and alcohol our findings indicate that alcohol is an imperfect substitute for gasoline even in the long run as a consequence the need for a new fuel substitution must be initiated long before petroleum reserves vanish

stock market quality in the presence of a traded option we use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option we find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated the time series properties of the stock price depend directly on the intrinsic value of the option when the intrinsic value of the option is positive informational efficiency is higher in the market for the stock and volatility is lower we provide evidence that the introduction of an option improves market quality in the underlying asset

are credit default swaps a sideshow evidence that information flows from equity to cds markets in this paper we provide evidence that equity returns lead credit protection returns at daily and weekly frequencies while credit protection returns do not lead equity returns our results indicate that informed traders are primarily active in the equity market rather than the cds market these findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs we also find that credit protection returns respond more quickly during salient news events earnings announcement days compared to days with similarly volatile equity returns this evidence regarding the response of credit protection returns to news provides support for explanations related to investor inattention

the role of money supply shocks in the short run demand for money abstract previous money demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest rate fluctuations in response to innovations in nominal money we propose a shock absorber money demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings expected changes do not engender such fluctuations in real money inventories in simultaneous estimates for eight industrial countries the shock absorber model proved empirically superior

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

slow diffusion of information and price momentum in stocks evidence from options markets this paper investigates the source of price momentum in the stock market using information from options markets we provide direct evidence of the gradual information diffusion model in hong and stein 1999 momentum profits are larger for stocks whose information diffuses slowly into the stock market we exploit the options markets to identify stocks with slow information diffusion speed as informed traders trade options to realize the information that has not been fully incorporated in the stock price we are able to enhance the momentum strategy by selecting winner loser stocks with high growth large drop in call option implied volatility our empirical strategy generates a risk adjusted alpha of 1 8 per month over the 1996 2011 period during which the simple momentum strategy fails to perform the results are robust to the impact of earnings announcement transaction costs industry concentration and choice of options moneyness and time to maturity finally our finding is not driven by existing stock or option related characteristics that are known to improve momentum

price discovery in the u s treasury market automation vs intermediation this paper examines the contribution to price discovery by electronic and voice based trading systems in the u s treasury market evidence shows that the electronic trading system has more price discovery and that trading automation increases the speed of incorporating information into prices however human trading generates significant price discovery though its volume is low the relative contribution of a trading system to price discovery depends on liquidity volatility volume trade size and order imbalance the voice based trading system contributes more to price discovery when trade size is large and liquidity is low these findings provide important implications for the design of electronic markets for securities with different characteristics and trading environments this paper was accepted by wei xiong finance

derivatives traders reaction to mispricing in the underlying equity this article examines trading behavior in the options market conditioned on mispricing in the underlying stock we investigate the price equilibrium between the observed equity asset and the options implied synthetic share as well as the relative divergence between the two prices we find a consistently positive relation between the level of stock mispricing and violations of the upper boundary condition using derivatives along with an increase in price divergence to control for the effect of shorting limitations on mispricing we further examine prices during the short sale ban in 2008 the results hold and in many instances are more significant during the ban period given the persistent disequilibria between the synthetic and observed stock prices we argue the results are evidence of informed trading in the derivatives market

trading breaks and asymmetric information the option markets abstract we find that weekend holiday and overnight trading breaks generate excessive perceived risk in the option markets presumably due to asymmetric information which in turn encourages uninformed option traders to postpone trading this perceived risk subsides after two days accompanied by an increase in the option trading volume and the underlying index s actual price volatility these results shed light on the informational role of index options and suggest that the theoretical models results regarding information processing and price discovery in the presence of private information are not limited to single stocks but also apply to the market as a whole

gasoline demand in the oecd an application of pooling and testing procedures abstract this study utilizes a pooled inter country data set finding the long run price elasticity falls in the range 0 55 to 0 9 depending on the choice of pooled estimators the estimators included the ols within and between country estimators plus five feasible gls estimators even allowing for a ten year distributed lag on price to reflect changes in auto efficiency characteristics the within country estimator yields appreciably more inelastic estimates than did the o s estimator which was heavily influenced by the between or inter country variation this difference raises intriguing questions for future research

rolling settlement and market liquidity this paper investigates the impact on uk stock and option markets of the change from an account based settlement system to a rolling settlement procedure such a change increases the transaction costs of short term margin traders and is likely to impact on the liquidity of the underlying market as well as trading in the options market evidence is presented that the settlement procedure does impact on the liquidity of the market further we find that rolling settlement increased market liquidity consistent with the exit of margin traders as a result of the increase in short selling costs associated with this increase in liquidity is a significant reduction in nonoptionable stock trading volume implying that margin trading may have been more prevalent in stocks without options finally it is shown that while trading in stock options increased the volatilities implied from call and put option prices indicate that put options have become relatively more expensive this reflects the change in demand i

equilibrium open interest abstract this paper analyses what determines an individual investor s risk sharing demand for options and aggregating across investors what the equilibrium demand for options we find that agents trade options to achieve their desired skewness specifically we find that portfolio holdings boil down to a three fund separation theorem that includes a so called skewness portfolio that agents like to attain our analysis indicates also however that the common risk sharing setup used for option demand and pricing is incompatible with a stylized fact about open interest across strikes

complete markets informed trading and equity option introductions this paper proposes and tests a new hypothesis concerning the price impact of option introductions on the underlying asset we argue that the leverage properties of options induce a higher level of informed trading in the aggregate market underlying plus derivative resulting in excess listing day price movements in the newly optioned equity using an alternative dataset our results suggest that this may be an explanation for the observed positive than negative excess listing day returns of us optioned stocks over the past thirty years

the response of interest rates to the federal reserve s weekly money announcements the puzzle of anticipated money abstract researchers using the survey conducted by money market services inc have found that the anticipated component in the federal reserve s weekly money supply announcement is negatively correlated with the post announcement change in market yields we prove that eliminating a downward bias in the measure of anticipated money can in theory eliminate this puzzle but that improving the efficiency of an already unbiased measure cannot we find using canadian as well as u s interest rate data that correcting the downward bias in the survey measure reduces but does not eliminate the role of anticipated money

india s petroleum demand estimations and projections energy security is crucial for sustaining high economic growth in india this article empirically estimates india s long and short term demand relations for crude oil diesel and petrol gasoline using the ardl and ecm cointegration procedures and then uses them to project demand for these products up to 2025 under various scenarios of gdp growth and oil prices our projections show that over 2012 to 2025 demand is likely to increase by about 74 for crude oil 117 for diesel and 136 for petrol the annual growth rates being about 4 3 for crude oil 6 1 for diesel and 6 8 for petrol gasoline this article suggests that india needs to 1 take measures to improve efficiency in the use of petroleum products 2 try to enhance supplies such as through production sharing agreements by indian oil companies with other countries and 3 increase the use of nuclear hydro solar and other alternative energy sources as western european countries have done

transport and energy demand in mexico the personal income shock abstract the paper examines the impact on gasoline demand in mexico that may arise from the identified surge in number of private vehicles that occurs in developing countries when a certain income per capita is reached insofar as the country s gdp capita in the year 2000 is extremely close to the threshold value rapid automobile growth scenarios corresponding to different economic growth rates are compared with a business as usual one to exhibit the corresponding surge in gasoline demand to be expected from this personal income shock its occurrence requires to reassess not only the current energy supply policies but also the environmental ones

gambling preferences options markets and volatility this study examines whether the gambling behavior of investors affects volume and volatility in financial markets focusing on the options market we find that the ratio of call option volume relative to total option volume is greatest for stocks with return distributions that resemble lotteries consistent with the theoretical predictions of stein 1987 we demonstrate that gambling motivated trading in the options market influences future spot price volatility these results not only identify a link between lottery preferences in the stock market and the options market but they also suggest that lottery preferences can lead to destabilized stock prices

forecasting energy consumption and energy related co2 emissions in greece an evaluation of the consequences of the community support framework ii and natural gas penetration abstract this study seeks to assess the future demand for energy and the trajectory of co2 emissions level in greece taking into account the impact of the community support framework csf ii on the development process and the penetration of natural gas which is one of the major csf ii interventions in the energy system demand equations for each sector of economic activity traded non traded public and agricultural sector and for each type of energy oil electricity and solid fuels are derived the energy system is integrated into a fully developed macroeconometric model so that all interactions between energy prices and production factors are properly taken into account energy co2 forecasts are then derived based on alternative scenarios for the prospects of the greek economy according to the main findings of the paper the growth pattern of forecast total energy consumption closely follows that of forecast output showing no signs of decoupling as regards co2 emissions they are expected to increase with an annual average rate which is higher than world forecasts

valuing dealers informational advantage a study of canadian treasury auctions in many financial markets dealers have the advantage of observing the orders of their customers to quantify the economic benefit that dealers derive from this advantage we study detailed data from canadian treasury auctions where dealers observe customer bids while preparing their own bids in this setting dealers can use information on customer bids to learn about i competition that is the distribution of competing bids in the auction and ii fundamentals that is the ex post value of the security being auctioned we devise formal hypothesis tests for both sources of informational advantage in our data we do not find evidence that dealers are learning about fundamentals we find that the information about competition contained in customer bids accounts for 13 27 of dealers expected profits

information quality and options microstructure researchers have long understood that information quality has an effect on price formation in the underlying asset market however option researchers have largely ignored the fact that information quality might also impact the options market this article characterizes the nature of the impact by showing how option prices and implied volatility levels are related to the forward looking information quality path this result follows from a noisy rational expectations model that abandons the normal distribution in favor of the gamma distribution but maintains the standard assumption of exponential utility thus the new model bridges the gap between the microstructure literature that relies so heavily on the normal exponential framework and the options literature that relies exclusively on models that are consistent with the limited liability of stock prices the model s tractability allows for a robustness check against the standard framework and provides a viable setting for analyzing the empirical implications of information quality for the options market jel d8 gl

convertible bond arbitrage liquidity externalities and stock prices abstract in the context of convertible bond issuance we examine the impact of arbitrage activity on underlying equity markets in particular we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006 there is considerable evidence of arbitrage induced short selling resulting from issuance moreover we find strong evidence that this activity is systematically related to liquidity improvements in the stock these results are robust to controlling for the potential endogeneity of arbitrage activity

energy demand in greece abstract this paper examines the impact of the two energy crises 1973 74 and 1978 79 on energy demand in greece initially some specific characteristics of energy consumption patterns before and after 1973 are presented and compared then demand parameters for hydroelectric energy liquid fuels and solid fuels were estimated using data for the period 1963 1984 and alternative econometric methods ols 2sls fiml to ensure that estimates do not vary across different estimation methods appropriate tests were used to examine whether a structural change in energy demand has occured following either of the two crises the results indicate that while consumption patterns may be different due to price and income changes after the crises the parameters of energy demand in greece have remained unchanged

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

price changes of related securities the case of call options and stocks this paper tests the hypothesis that option prices contain information not reflected in con temporaneous stock prices an options transactions data base is used for the purpose the evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid ask spread for intra day holding periods implications of the profits in the overnight holding periods are discussed

temporal patterns in foreign exchange returns and options although the foreign exchange market is believed to be one of the most efficient financial markets in the world there is significant evidence that technical analysis is profitable in this market in this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns we find that information from the options market improves the performance of technical trading strategies strategies using information from at the money options were more consistently profitable than the most commonly used strategies based on only historical spot exchange rates past prices our results hold out of sample as well as in the late nineties a period when few sources of information have proven reliable consequently options appear to contain valuable information regarding future spot exchange rate movements