Options Trading and Stock Price Crash Risk
43 Pages Posted: 9 May 2014 Last revised: 16 Sep 2014
Date Written: September 16, 2014
Abstract
Using a sample of U.S. firms between 1996 and 2011, this paper documents a positive association between options trading volume and future stock price crash risk. This relation is evidently more pronounced among firms with higher information asymmetry, business uncertainty, and short-sale constraints. In a dichotomous cross-sectional setting, we also document that firms with options trading have higher future crash risk than firms without options trading. We further show in a difference-in-difference analysis that firms experience an increase in crash risk immediately after the listing of options. The results suggest that options traders are able of identifying bad news hoarding by management and choose to trade in a liquid options market in anticipation of future crashes.
Keywords: crash risk, options trading
JEL Classification: G10, G11, G12, G14
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