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Author: Marco Klapper Publisher: Anchor Academic Publishing (aap_verlag) ISBN: 3954896729 Category : Business & Economics Languages : en Pages : 70
Book Description
This study examines the kind of information ‘informed’ traders have prior to a takeover announcement using options of target firms and elaborates on the cross-sectional relationship between options and stocks around takeover announcements. Financial markets are driven by information and by individuals that generate, process, and disclose this information to the market. Naturally, there have to be individuals who possess more information about a firm or a future event than other market participants. Mergers and acquisitions are particularly interesting events in this regard because they can have significant implications for the firms and stakeholders involved, as well as for the competitive dynamics in the respective market. Because of the large potential price impact of such transactions, traders with private information about a prospective takeover are expected to trade on this information to make a profit. But who are these ‘informed traders’ and what kind of information do they possess? This study tries to give a respond to this question.
Author: Marco Klapper Publisher: Anchor Academic Publishing (aap_verlag) ISBN: 3954891727 Category : Business & Economics Languages : en Pages : 73
Book Description
This study examines the kind of information ‘informed’ traders have prior to a takeover announcement using options of target firms and elaborates on the cross-sectional relationship between options and stocks around takeover announcements. Financial markets are driven by information and by individuals that generate, process, and disclose this information to the market. Naturally, there have to be individuals who possess more information about a firm or a future event than other market participants. Mergers and acquisitions are particularly interesting events in this regard because they can have significant implications for the firms and stakeholders involved, as well as for the competitive dynamics in the respective market. Because of the large potential price impact of such transactions, traders with private information about a prospective takeover are expected to trade on this information to make a profit. But who are these ‘informed traders’ and what kind of information do they possess? This study tries to give a respond to this question.
Author: Gautam Kaul Publisher: ISBN: Category : Languages : en Pages : 34
Book Description
We assess the presence and nature of strategic trading by informed investors in the options market. Specifically, we develop and test a model for the spread of an option that directly captures the effects of strategic trading by informed traders. We show that the underlying stock's spread has an important impact on the option spreads due to the hedging activities of option market makers. The initial hedging costs explain half the effective spread of at-the-money or in-the-money options. For out-of-the-money options, initial hedging costs explain less than one third of the spread, but nevertheless play an important economic role. Rebalancing costs associated with hedging are much smaller than the theoretical values, however. This suggests that although option dealers hedge their positions, they do not hold their positions for long. We also find that the adverse selection component of the underlying stock's spread explains a significant fraction of the option spread. More importantly, contrary to conventional wisdom, adverse selection costs are higher for (the most actively traded) at-the-money or slightly out-of-the-money contracts relative to out-of-the money options. The results of the array of tests conducted in this paper, taken together, suggest that informed traders trade strategically in options markets, recognizing the trade-off between leverage and transactions costs associated with option contracts of different moneyness.
Author: Marco Klapper Publisher: Anchor Academic Publishing (aap_verlag) ISBN: 3954896729 Category : Business & Economics Languages : en Pages : 70
Book Description
This study examines the kind of information ‘informed’ traders have prior to a takeover announcement using options of target firms and elaborates on the cross-sectional relationship between options and stocks around takeover announcements. Financial markets are driven by information and by individuals that generate, process, and disclose this information to the market. Naturally, there have to be individuals who possess more information about a firm or a future event than other market participants. Mergers and acquisitions are particularly interesting events in this regard because they can have significant implications for the firms and stakeholders involved, as well as for the competitive dynamics in the respective market. Because of the large potential price impact of such transactions, traders with private information about a prospective takeover are expected to trade on this information to make a profit. But who are these ‘informed traders’ and what kind of information do they possess? This study tries to give a respond to this question.
Author: Justin Vitanza Publisher: ISBN: Category : Information theory in finance Languages : en Pages : 83
Book Description
"In this paper, I present evidence that informed traders represent a large enough portion of option market activity to impact market prices. By entering the market on the long side before positive or negative events, they drive up both open interest and ask prices, while bid prices remain relatively stable. Seeing this pattern is indicative of either positive (when found in calls) or negative (for puts) future news announcements. When conditioning on these announcements, we also see that this pattern predicts return reactions. In particular, information embedded in option prices is useful in predicting earnings surprises and reactions to mergers. My primary measure of option information content is the change in the difference between implied volatility and realized daily volatility measured over the previous month. With hindsight, this difference rises prior to positive announcements for call options, while it rises prior to negative announcements for put options. This differential behavior provides strong evidence that these assets are not redundant in practice, as is often implied by option pricing models. Further, this information constitutes a primary risk factor in equity markets, as positive announcement risk is positively related to future returns due to the procyclicality of these announcements. Efficiently utilizing this information suggests a long-short trading strategy that yields over 1.2 percent per month. This strategy also completely explains the call-put volatility spread anomaly and is robust to controls for aggregate volatility sensitivity and known metrics that purport to monitor informed trading"--Page v.
Author: Cyriel de Jong Publisher: ISBN: Category : Languages : en Pages : 35
Book Description
We use a sequential trade model to clarify two mechanisms following the introduction of an option that may lead to increased efficiency in the underlying. On the one hand, market makers learn from trades in the option market and set more accurate prices. On the other hand, the proportion of informed traders in the stock market may be altered depending on the informed traders' strategies. If insiders trade a larger fraction than uninformed traders in the stock, for example because the immediate profits in the stock are larger, spreads in the stock widen, and price errors may increase. This reduces the efficiency increase from the 'learning' effect, possibly to the extent that overall efficiency deteriorates. We use simulations to analyze the resulting impact in a dynamic setting. For realistic parameter values we find that option trading leads to lower price errors in the underlying. The more popular options are, the more quickly information is incorporated in the underlying prices. However, uninformed traders do not necessarily benefit from this speedier convergence. Their stock performance crucially depends on the insider's trading strategy and the fraction of informed trading.
Author: Iván Blanco Publisher: Ed. Universidad de Cantabria ISBN: 8481028770 Category : Business & Economics Languages : en Pages : 90
Book Description
Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal.
Author: Patrick Augustin Publisher: ISBN: Category : Languages : en Pages : 34
Book Description
There is sufficient evidence in the popular, legal, and financial literature that informed options trading ahead of scheduled and unexpected corporate events is pervasive. In this review, we piece together the extant evidence on this topic into a cohesive picture, which includes abnormal activity ahead of announcements of earnings, mergers and acquisitions, as well as numerous other corporate events. We also discuss the more limited evidence on informed trading in other derivatives markets, such as credit default swaps (CDSs). In addition, we characterize the impact and features of illegal insider trading, and insider trading networks. We also provide a brief overview of the legal framework in the U.S. concerning legal and illegal insider trading, in order to emphasize the challenges associated with identifying informed options trading. We end with our suggestions regarding future research opportunities in this broad topic.
Author: Tom Arnold Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
In our sample of 305 cash tender offers occurring between 1993 and 1998, we find evidence that the options market has become the preferred trading venue for informed traders. Given this result, we analyze individual call option contracts for those tender offer targets with traded options, identifying the one optimal insider contract which maximizes the returns to insiders with perfect knowledge of a pending tender offer. This analysis allows us to test the competing market anticipation and insider trading theories of pre-bid stock price and volume run-ups using the trading patterns of options which should be preferred by insiders and those preferred by speculators. Our individual contract analysis is consistent with both theories as we find trading in both insider-preferred and speculator-preferred contracts drives aggregate call option volume run-ups. However, heavy trading in the optimal insider contract occurs on heavy volume days for all contracts. These results support the notion of Easley, O'Hara, and Srinivas (1998) that a substitution effect exists whereby informed traders prefer to trade in options markets when possible and that insiders will hide their trades within those of speculators.
Author: Marco Klapper
Author: Marco Klapper
Author: Gautam Kaul
Author: Marco Klapper
Author: Cyriel de Jong
Author: Justin Vitanza
Author: Cyriel de Jong
Author: Iván Blanco 
Author: Patrick Augustin
Author: Pierre Dufresne
Author: Tom Arnold