Information content of options trading volume for future volatility: Evidence from the Taiwan options market

Chuang Chang Chang, Pei Fang Hsieh, Yaw Huei Wang

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

This study follows the approach of Ni et al. [Ni, S.X., Pan, J., Poteshman, A.M., 2008. Volatility information trading in the option market. Journal of Finance 63, 1059-1091] - 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 (less than 1% of individuals' trades) might be informed and realize their volatility information using the strangle strategy. 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.

Original languageEnglish
Pages (from-to)174-183
Number of pages10
JournalJournal of Banking and Finance
Volume34
Issue number1
DOIs
StatePublished - Jan 2010

Keywords

  • Emerging markets
  • Foreign investors
  • Option volume
  • Volatility

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