This paper investigates the motive of option trading. We show that option trading is mostly driven by differences of opinion, a finding different from the current literature that attempts to attribute option trading to information asymmetry. Our conclusion is based on three pieces of empirical...

We provide a new framework for estimating the systematic and idiosyncratic jump tail risks in financial asset prices. The theory underlying our estimates are based on in-fill asymptotic arguments for directly identifying the systematic and idiosyncratic jumps, together with conventional...

We propose a new threshold–pre-averaging realized estimator for the integrated co-volatility of two assets using non-synchronous observations with the simultaneous presence of microstructure noise and jumps. We derive a noise-robust Hayashi–Yoshida estimator that allows for very general...

We document the ability of the credit default swap (CDS) market to anticipate favorable as well as unfavorable credit rating change (RC) announcements based on more extensive samples of credit rating events and CDS spreads than previous studies. We obtain four new results. In contrast to prior...

Principal component analysis of equity options on Dow-Jones firms reveals a strong factor structure. The first principal component explains 77% of the variation in the equity volatility level, 77% of the variation in the equity option skew, and 60% of the implied volatility term structure across...

Under proportional transaction costs, a price process is said to have a consistent price system, if there is a semimartingale with an equivalent martingale measure that evolves within the bid-ask spread. We show that a continuous, multi-asset price process has a consistent price system, under...

Using eight measures of liquidity, and addressing the potential endogeneity of initial returns, we find underpricing generally increases the secondary market liquidity of IPOs over the first year of trading, irrespective of the horizon over which liquidity is measured. For two model...

Using a large proprietary database of institutional trades, we investigate whether institutional investors drive the turn-of-the-year (TOY) effect. Institutions that engage in window dressing, tax-loss selling, or risk shifting will contribute to the TOY effect by selling small, poorly...

In questioning Kamstra, Kramer, and Levi’s (2003) finding of an economically and statistically significant seasonal affective disorder (SAD) effect, Kelly and Meschke (2010) make errors of commission and omission. They misrepresent their empirical results, claiming that the SAD effect arises...

A specific day-trading policy in Taiwan futures market allows an investigation of the performance of day traders. Since October 2007, investors who characterize themselves as “day traders” by closing their day-trade positions on the same day enjoy a 50% reduction in the initial margin....