Volatility Information Trading in the Option Market

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1、THEJOURNALOFFINANCE•VOL.LXIII,NO.3•JUNE2008VolatilityInformationTradingintheOptionMarketSOPHIEX.NI,JUNPAN,andALLENM.POTESHMAN∗ABSTRACTThispaperinvestigatesinformedtradingonstockvolatilityintheoptionmarket.Weconstructnon-marketmakernetdemandforvolatilityfromthetradingvolumeofindividuale

2、quityoptionsandfindthatthisdemandisinformativeaboutthefuturerealizedvolatilityofunderlyingstocks.Wealsofindthattheimpactofvolatilityde-mandonoptionpricesispositive.Moreimportantly,thepriceimpactincreasesby40%asinformationalasymmetryaboutstockvolatilityintensifiesinthedaysleadinguptoear

3、ningsannouncementsanddiminishestoitsnormallevelsoonafterthevolatilityuncertaintyisresolved.THELASTSEVERALDECADEShavewitnessedastonishinggrowthinthemarketforderivatives.Themarket’scurrentsizeof$200trillionismorethan100timesgreaterthan30yearsago(Stulz(2004)).Accompanyingthisimpressivegro

4、wthinsizehasbeenanequallyimpressivegrowthinvariety:Thederivativesmar-ketnowcoversabroadspectrumofrisk,includingequityrisk,interestraterisk,weatherrisk,and,mostrecently,creditriskandinflationrisk.Thisphenome-nalgrowthinsizeandbreadthunderscorestheroleofderivativesinfinancialmarketsandth

5、eireconomicvalue.Whilefinancialtheoryhastraditionallyem-phasizedthespanningpropertiesofderivativesandtheirconsequentabilitytoimproverisk-sharing(Arrow(1964)andRoss(1976)),theroleofderivativesasavehicleforthetradingofinformedinvestorshasemergedasanotherimportanteconomicfunctionofthesese

6、curities(Black(1975)andGrossman(1977)).Wecontributetothebodyofknowledgeontheeconomicvalueofderivativesbyinvestigatingtheroleofoptionsasamechanismfortradingoninforma-tionaboutfutureequityvolatility.Ourfocusoninformedvolatilitytradingismotivatedtoalargeextentbythefactthatequityoptionsare

7、uniquelysuitedtoinvestorswithinformationaboutfuturevolatility.Unliketraderswith∗NiisattheHongKongUniversityofScienceandTechnology.PanisattheMITSloanSchoolofManagementandNBER.PoteshmanisattheUniversityofIllinoisatUrbana-Champaign.WethankJoeLevin,EileenSmith,andDickThalerforassistancew