Does the early bird catch the worm? The information content of Taiwan's index option trading in the early 15-min pre-opening session

Wenchien Liu*, Wen-liang Hsieh, Anthony H. Tu

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

We examine the information content of index options trading during the pre-opening session. Using data from the Taiwan market, we find that variables constructed based upon option implied volatility and option volume imbalance in the pre-opening session can predict spot index and ETF returns for up to ten minutes after the spot market opening. This finding remains robust, even after controlling for the pre-opening returns of index futures, which suggests that pre-opening trading in index options plays a critical and unique role in price discovery prior to the opening of the spot market. Such predictive ability is stronger for short-term options, near-the-money options, and for options that are away from expiration days. We also find that pre-opening options trading reflects the uncertainty transmitted from overseas markets, showing lower predictive ability on days with less definite overnight information (greater CBOE VIX).

Original languageEnglish
Pages (from-to)168-189
Number of pages22
JournalNorth American Journal of Economics and Finance
Volume41
DOIs
StatePublished - 1 Jul 2017

Keywords

  • Information content
  • Options trading
  • Pre-opening trading
  • Predictive ability

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