| dc.description.abstract | This essay contains two studies on information content in options markets.
Having obtained a unique dataset with detailed information on transaction records in the TAIEX option market, we provide evidence of varying degrees of predictability from different classes of investors. In the first part of this essay, we set out to investigate the information content of options trading to examine the predictive power of the put and call positions of different types of traders in the TAIEX option market. We find that options volume, as a whole, carries no information on TAIEX spot index changes. On the other hand, however, although foreign institutional investors do not engage in much trading, there is strong evidence to show that the trading in which they do engage has significant predictive power on the underlying asset returns. We also find that foreign institutional investors have greater predictive power with regard to in near-the-money and middle-horizon options.
In the second part of this study, we follows the approach of Ni, Pan and Poteshman (2008) – based upon the vega-weighted net demand for volatility – to determine whether volatility information exists within the Taiwan options market. Our empirical results show that foreign institutional investors possess the strongest and most direct volatility information, which is realized by the delta-neutral options/futures trades. In addition, a few individual investors’ trading volume from strangles (less than 1% of individuals’ trades) show some predictive power of future volatility. Surprisingly, we find no evidence to support the predictive ability of the volatility demand from straddle trades, despite the widespread acknowledgement that such trades are sensitive to volatility.
Our study sheds some light on the foreign capital flows in the Taiwan option market which may have predictive power with regard to the underlying asset. Our investigation may provoke further study of the information content of index option markets, which are generally viewed as being less informative than individual stock markets.
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