Three Essays in Financial Markets. The Bright Side of Financial Derivatives: Options Trading and Firm Innovation

Three Essays in Financial Markets. The Bright Side of Financial Derivatives: Options Trading and Firm Innovation
Author: Iván Blanco
Publisher: Ed. Universidad de Cantabria
Total Pages: 90
Release: 2019-02-15
Genre: Business & Economics
ISBN: 8481028770

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.

Essays on Option Market Information Content, Market Segmentation and Fear

Essays on Option Market Information Content, Market Segmentation and Fear
Author: Mishuk Anwar Chowdhury
Publisher:
Total Pages:
Release: 2012
Genre: Fear
ISBN:

This dissertation consists of three essays. The first essay tests whether stock returns can be predicted using divergence from put-call parity. Using a robust methodology that controls for the early exercise premium of American put and call options, the study shows that stocks with upside divergence from put-call parity outperform stocks with downside divergence from put-call parity. Predictability is persistent over multiple holding periods and divergence is also predictive of tail events. The second essay examines segmentation of equity and option markets in the presence of information asymmetry. The study uses the slope of the implied volatility skew as a proxy for negative jump risk, option implied stock price as a measure of deviation from put-call parity, and the daily short-sell volume ratio as a measure of negative information flow in the equity market. The option market based signals predict future returns more reliably than the short-sell based signals. Short-sellers only profit when their convictions line-up with negative signals in the option market. The third essay introduces a measure of fear derived from the implied volatility smile. The study examines the relationship between fear and the cross section of option returns. The results show that put options written on stocks with high fear premium outperform put options written on stocks with low fear premium. Fear does not predict the realization of a tail event. This finding confirms the irrational nature of fear.

Essays on Single-Stock Futures and Options Markets

Essays on Single-Stock Futures and Options Markets
Author: Cuyler Lawrence Strong
Publisher:
Total Pages: 141
Release: 2020
Genre: Options (Finance)
ISBN:

These two essays demonstrate the important role that derivative markets play in assimilating information into financial markets. In the first essay I use the 2008 short-selling ban to examine the impact of single-stock futures (SSFs) trading on options market quality. I show that there is a substitution effect between options trading and SSFs trading during the ban period. In addition, my results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks without SSFs, stocks with SSFs were less likely to violate put-call parity during the ban period. My results suggest that SSFs trading helps mitigate the negative effect of the short-selling ban on options market quality documented in the literature.In the second essay I look at information flows through large option trades. The motivation comes from CNBC's "Halftime Report" which regularly covers unusual option activity, i.e., those abnormally large trades, and recommend investors to follow the "smart money". I investigate the impact of the CNBC coverage on underlying stock prices and whether investors can indeed profit by following the "smart money". I document an immediate spike in trading volume and abnormal returns at the time of the CNBC coverage, and evidence that the unusual option trades are informative of stock prices around the coverage. However, I also document a significant reversal in underlying stock prices following the CNBC coverage. Using the same criteria advocated by the CNBC commentators, I identify unusual option activities for a large sample of stocks without CNBC coverage. I confirm that the unusual option trades significantly predict underlying stock returns, but find no evidence of reversal in underlying stock prices. My findings suggest that the CNBC coverage of unusual option activity has a destabilizing effect on underlying stock prices and investors cannot profit by simply following the CNBC reporting on the "smart money".

Essays on Inference from Option Markets

Essays on Inference from Option Markets
Author: Asad Dossani
Publisher:
Total Pages: 140
Release: 2018
Genre:
ISBN:

This dissertation consists of three chapters that analyze the economic information contained in option markets. Option markets are forward looking, and thus contain valuable insight into the beliefs of financial market participants. They can be used to study risk premia and to make forecasts. The Chapter 1, Central Bank Tone and Currency Risk Premia, asks how the tone of central bank press conferences impacts risk premia in the currency market. First, I find that option implied risk aversion increases when central banks are hawkish, and decreases when central banks are dovish. Second, I find that hawkish central bank tone predicts higher future variance risk premia, and vice versa. One explanation for this result is that the tone of a press conference indicates to investors the likelihood of central bank intervention, conditional on the state of the economy. Chapter 2, Monetary Stimulus and Perception of Risk, investigates the relationship between monetary stimulus and the perception of risk in financial markets, and how this varies across asset classes. First, I document a positive relationship between monetary stimulus and the perception of risk in equity, commodity, and currency markets. I document a negative relationship between monetary stimulus and the perception of risk in bond markets. Second, I establish a cointegrating relationship between monetary stimulus and implied volatility, indicating a positive long run equilibrium relationship in the levels of monetary stimulus and implied volatility. This relationship is present across asset classes. Third, I document the link between monetary stimulus and expected inflation, a possible mechanism by which monetary stimulus affects the perception of risk across financial markets. Chapter 3, Option Augmented Density Forecasts of Market Return with Monotone Pricing Kernel, considers consider an option augmented density forecast of the market return obtained by transforming a baseline density forecast estimated from past excess returns so as to monotonize its ratio with a risk neutral density estimated from current option prices. We find that monotonizing the pricing kernel leads to a modest improvement in the calibration of density forecasts.

The Trading Efficiency on Options Market

The Trading Efficiency on Options Market
Author: Yan Feng
Publisher:
Total Pages: 156
Release: 2013
Genre:
ISBN: 9781303532733

F. Black (1975) in his seminal paper "Fact and Fantasy in the use of options" mentioned a number of fantasies that widely spread in the options markets. Since Black's (1975) paper was published, there were significant changes and innovations in the options markets. The purpose of this paper is to address some of the pricing and trading aspects in the options markets.

Essays on Information in Options Markets

Essays on Information in Options Markets
Author: Mr. Travis Lake Johnson
Publisher:
Total Pages:
Release: 2012
Genre:
ISBN:

In the first chapter, my coauthor and I examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket asymmetric information model, equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 0.34% per week (19.3% annualized). Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information. In the second chapter, I show that in many asset pricing models, the equity market's expected return is a time-invariant linear function of its conditional variance, which can be estimated from options markets. However, I show that when the relation between conditional means and variances is state-dependent, an observer requires the combined information in multiple variance horizons to distinguish among the states and thereby reveal the equity risk premium. Empirically, I show that while the VIX by itself has little predictive power for future S & P 500 returns, the VIX term structure predicts next-quarter S & P 500 returns with a 5.2% adjusted R-squared.