Where Do Informed Traders Trade? Evidence from French Markets

Abstract

The aim of this paper is to examine the transmission of information between the French spot market and the Marche des Options Negociables de Paris (MONEP). Using high frequency data provided by Euronext Paris, we empirically investigate the direction and the timing of the flow of information between CAC40 cash index, futures and options by using Granger linear and nonlinear causality tests. Consistent with the trading cost assumption, our results indicate overall that the futures market leads both the spot and the option markets and also that the cash market leads the option market. Most of the information flows from the futures to the spot with a linear dependence which falls inside a ten-minutes-length interval, while spot and futures lead options by twenty minutes. Moreover, using transaction time instead of fixed length intervals, we find that the time-adjustment between futures and spot is shorter, while their returns up to lag one have no predictive power for current option returns. Finally, we report significant bi-directional causality between the three assets, revealing the activity of arbitrageurs. These findings suggest that markets are more integrated than reported by the previous studies, even in the case of a thin market.

Keywords: Informed trades, derivatives markets, transaction-time, linear and nonlinear causality

JEL Classification: C32, G13, G14