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Conference Paper: The effect of options on information acquisition and asset pricing

TitleThe effect of options on information acquisition and asset pricing
Authors
KeywordsOption
Information acquisition cost
Rational expectation equilibrium
Derivatives
Issue Date2016
Citation
The 28th Annual Conference of the Northern Finance Association (NFA 2016), Queen's University, Mont Tremblant, QC., Canada, 16-18 September 2016. How to Cite?
AbstractWe 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.
DescriptionSession - Options
Persistent Identifierhttp://hdl.handle.net/10722/233177

 

DC FieldValueLanguage
dc.contributor.authorHuang, S-
dc.date.accessioned2016-09-20T05:35:06Z-
dc.date.available2016-09-20T05:35:06Z-
dc.date.issued2016-
dc.identifier.citationThe 28th Annual Conference of the Northern Finance Association (NFA 2016), Queen's University, Mont Tremblant, QC., Canada, 16-18 September 2016.-
dc.identifier.urihttp://hdl.handle.net/10722/233177-
dc.descriptionSession - Options-
dc.description.abstractWe 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.languageeng-
dc.relation.ispartofAnnual Conference of the Northern Finance Association, NFA 2016-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectOption-
dc.subjectInformation acquisition cost-
dc.subjectRational expectation equilibrium-
dc.subjectDerivatives-
dc.titleThe effect of options on information acquisition and asset pricing-
dc.typeConference_Paper-
dc.identifier.emailHuang, S: huangsy@hku.hk-
dc.identifier.authorityHuang, S=rp02052-
dc.description.naturepostprint-
dc.identifier.hkuros263278-

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