A0223
Title: Betting against the crowd: Option trading and market risk premium
Authors: Gang Li - The Chinese University of Hong Kong (Hong Kong) [presenting]
Jie Cao - The Hong Kong Polytechnic University (Hong Kong)
Xintong Zhan - The Chinese University of Hong Kong (Hong Kong)
Guofu Zhou - Washington University in St. Louis (United States)
Abstract: The purpose is to study how equity option trading affects the market risk premium. It is found that a measure of aggregate call order imbalance (ACIB), defined as the cross-sectional average of the difference between open-buy and open-sell volume, negatively forecasts future stock market returns significantly from days to months. Moreover, ACIB represents an option-based investor sentiment measure that accounts for excess option buying or selling and is highly correlated with the stock investor sentiment. The findings shed new insights on the distinctions for call-and-put option trading, index and equity options trading, and cross-sectional and time-series predictions.
