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...

Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in...

We provide a model with overconfident risk neutral investors, and therefore no risk premia, in which a price-based portfolio such as HML earns positive expected returns and loads on fundamental macroeconomic variables. Furthermore, loadings on such portfolios are proxies for mispricing, and...

We explore the sharp uptrend in trading activity during recent years. Higher turnover has been associated with more frequent smaller trades, which have progressively formed a larger fraction of trading volume over time. Evidence indicates that secular decreases in trading costs have influenced...

The identical cash flow rights of Chinese A and B shares provide a natural experiment that allows us to explore how investor clienteles affect stock return patterns. Chinese domestic retail investors are responsible for the majority of trades in A shares, while foreign institutional investors...

Equity options display a strong factor structure. The first principal components of the equity volatility levels, skews, and term structures explain a substantial fraction of the cross-sectional variation. Furthermore, these principal components are highly correlated with the S&P500 index option...

We develop a tractable dynamic model of an index option market maker with limited capital and characterize how option prices depend on inventory risk and market maker wealth. The risk averse market maker absorbs positive demand by end users and requires a more negative variance risk premium when...

We study the effect of options trading volume on the value of the underlying firm after controlling for other variables that may affect firm value. The volume of options trading might have an effect on firm value because it helps to complete the market (allocational efficiency) and because the...

We propose a protocol for identifying genuine risk factors. The underlying premise is that a risk factor must be related to the covariance matrix of returns, must be priced in the cross-section of returns, and should yield a reward-to-risk ratio that is reasonable enough to be consistent with...

Relatively little is known about the trading volume in derivatives relative to the volume in underlying stocks. We study time-series properties and the determinants of the options/stock trading volume ratio (O/S) using a comprehensive cross-section and time-series of data on equities and their...