Abstract
We empirically investigate the effects of option trading on the cross-listed stock returns. Using dual-listed stocks in mainland China (A) and Hong Kong (H) stock exchanges, we show that option order imbalance (OI) positively and significantly predicts daily stock returns for both markets, controlling for risk factors and firm characteristics. Informed trading rather than price pressure better explain the predictability. High OI stocks have higher trading volume and present lottery-like properties. Three important events significantly affect the predictive power of OI, consistent with the improved market quality and the episode of speculative trading. Robustness checks support the main findings.
| Original language | English |
|---|---|
| Pages (from-to) | 1665-1690 |
| Number of pages | 26 |
| Journal | Journal of Futures Markets |
| Volume | 40 |
| Issue number | 11 |
| Early online date | 3 Mar 2020 |
| DOIs | |
| Publication status | Published - Nov 2020 |
| Externally published | Yes |
Bibliographical note
Acknowledgment:We thank Torben Andersen, Biao Guo, Tse-Chun Lin, Neil Pearson, Viktor Torodov, Xuewei Yang, conference and seminar participants at 2019 International Conference of Futures and Other Derivatives, 2019 Chinese Financial Annual Meeting, and Zhejiang University for helpful comments. Xingguo Luo gratefully acknowledges the financial support from the National Natural Science Foundation of China (project no. 71771199) and the Fundamental Research Funds for the Central Universities. Qi Xu gratefully acknowledges the financial support from Zhejiang University and Academy of Financial Research, Zhejiang University. All remaining errors are ours.
Publisher Copyright:
© 2020 Wiley Periodicals, Inc.
Keywords
- cross-listing
- option trading
- order flow