Does Option Trading Have a Pervasive Impact on Underlying Stock Prices?

Sophie X Ni, Neil D Pearson*, Allen M Poteshman, Joshua White

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

The question of whether and to what extent option trading affects underlying stock prices has been of interest to researchers since exchange-based options trading began in 1973. Recent research presents evidence of an informational channel through which option trading affects stock prices by showing that option market makers' stock trades to hedge new options positions cause the information reflected in option trading to be impounded into underlying equity prices. This paper provides evidence of a noninformational channel through which option market maker hedge rebalancing affects stock return volatility and the probability of large stock price moves.

Original languageEnglish
Pages (from-to)1952-1986
Number of pages35
JournalReview of Financial Studies
Volume34
Issue number4
DOIs
Publication statusPublished - 1 Apr 2021

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

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