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Volatility Trading in Options Market: How Does It Affect Where Informed Traders Trade?
| Content Provider | Semantic Scholar |
|---|---|
| Author | Capelle-Blancard, Gunther |
| Copyright Year | 2005 |
| Abstract | Although it is widely accepted that options implied volatility is a good estimate of market expectations, very little work has focused on the impact of volatility trading on market microstructure. The present article attempts to fill this gap. We develop a multimarket sequential trades model with asymmetric information in which directional-traders and volatility-traders interact strategically. The major finding is that volatility-traders evict directional-traders from the options market. Indeed, we provide conditions under which volatility trades have a positive impact on options bid-ask spread so that directional-traders choose the spot market. While these results do not confirm that option returns lead spot returns, they are consistent with previous empirical findings. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.ecore.be/Papers/1240300065.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |