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Conference Paper: The effect of options on information acquisition and asset pricing
Title | The effect of options on information acquisition and asset pricing |
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Authors | |
Issue Date | 2016 |
Citation | The 2016 Finance Down Under Conference, Melbourne, Australia, 3-5 March 2016. How to Cite? |
Abstract | We study the effect of introducing an options market on investors' incentive to collect private
information in a rational expectation equilibrium model. We show that an options market has two
effects on information acquisition: a negative effect, as options act as substitutes for information,
and a positive effect, as informed investors have less need for options and can earn profits from
selling them. When the population of informed investors is high due to low information
acquisition cost, the supply for options is large, leading to low option prices. Low option prices in
turn induce investors to use options instead of information to reduce risk, while informed
investors earn little profits from selling options to cover their information acquisition cost.
Introducing an options market thus decreases investors' incentive to acquire information, and the
prices of the underlying assets become less informative, leading to lower prices and higher
volatilities. A dynamic extension of this analysis shows that introducing an options market
increases the price reactions to earnings announcements. However, when the information
acquisition cost is high, the opposite effects arise. Further analysis shows that our results are
robust for more general derivatives. These results provide a potentially unified theory to reconcile
the conflicting empirical findings on the options listing of individual stocks in both the U.S. market
and international markets. |
Description | Conference Theme: Building on the Best from the Cellars of Finance Call for Participants Parallel Sessions 2: Asset Pricing 1 |
Persistent Identifier | http://hdl.handle.net/10722/233175 |
SSRN |
DC Field | Value | Language |
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dc.contributor.author | Huang, S | - |
dc.date.accessioned | 2016-09-20T05:35:05Z | - |
dc.date.available | 2016-09-20T05:35:05Z | - |
dc.date.issued | 2016 | - |
dc.identifier.citation | The 2016 Finance Down Under Conference, Melbourne, Australia, 3-5 March 2016. | - |
dc.identifier.uri | http://hdl.handle.net/10722/233175 | - |
dc.description | Conference Theme: Building on the Best from the Cellars of Finance Call for Participants | - |
dc.description | Parallel Sessions 2: Asset Pricing 1 | - |
dc.description.abstract | We study the effect of introducing an options market on investors' incentive to collect private information in a rational expectation equilibrium model. We show that an options market has two effects on information acquisition: a negative effect, as options act as substitutes for information, and a positive effect, as informed investors have less need for options and can earn profits from selling them. When the population of informed investors is high due to low information acquisition cost, the supply for options is large, leading to low option prices. Low option prices in turn induce investors to use options instead of information to reduce risk, while informed investors earn little profits from selling options to cover their information acquisition cost. Introducing an options market thus decreases investors' incentive to acquire information, and the prices of the underlying assets become less informative, leading to lower prices and higher volatilities. A dynamic extension of this analysis shows that introducing an options market increases the price reactions to earnings announcements. However, when the information acquisition cost is high, the opposite effects arise. Further analysis shows that our results are robust for more general derivatives. These results provide a potentially unified theory to reconcile the conflicting empirical findings on the options listing of individual stocks in both the U.S. market and international markets. | - |
dc.language | eng | - |
dc.relation.ispartof | Finance Down Under Conference | - |
dc.title | The effect of options on information acquisition and asset pricing | - |
dc.type | Conference_Paper | - |
dc.identifier.email | Huang, S: huangsy@hku.hk | - |
dc.identifier.authority | Huang, S=rp02052 | - |
dc.description.nature | link_to_OA_fulltext | - |
dc.identifier.hkuros | 263276 | - |
dc.identifier.ssrn | 2666880 | - |
dc.customcontrol.immutable | sml 161114 - update | - |