Investment horizon and option market activity

초록

This paper uses a unique data set of institutional investors' equity and equity option holdings to investigate how their investment horizons are associated with option trading and its information content. Firms with more short-term investors have more active option markets relative to stock markets. Also, they have a greater proportion of option trading volume ascribed to high-leveraged contracts. Furthermore, both abnormal option trading before earnings announcements and informativeness of option market statistics are more pronounced when short-term investors predominate. These findings suggest that short-term institutions trade leveraged contracts actively to exploit information, thus effecting price discovery in option markets.

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