Information flow between derivatives and spot market; the reason of studies results divergence. (2015)

• Record Type: Journal Article
• Authors: Aloulou, Abderrahmen; Boujelbene, Younes
• Is Part Of: International journal of monetary economics and finance. Volume 8:Number 1(2015)
• Page Start: 20
• Page End: 33
• Publication Date: 2015
• Subjects: information flow -- informed traders -- trader preferences -- liquidity -- transactions costs -- leverage effect -- confidence in anticipation -- derivatives -- spot market -- options market -- asset prices -- stock markets -- information quality -- private information; Monetary policy -- Periodicals; Finance -- Periodicals; Economics -- Mathematical models -- Periodicals; 332.4
• Languages: English
• ISSNs: 1752-0479

Abstract

This paper explains the lack of general consensus in previous studies on the direction of information flow between stocks and derivatives markets. We assume that informed traders do not develop absolute preference for one market; rather they react to private information as case by case. We provide theoretical and empirical proofs to validate this hypothesis. While deciding where trading, informed traders are attracted by higher liquidity and less transactions costs in spot market, and leverage effect offered by options market. We find that the use of leverage effect, which can largely compensate transactions costs and liquidity lack, depends on exceeding critical value of confidence in anticipation expressed as function of option value elasticity with respect to the underlying asset's price. We conclude that information flow between the stock and option markets depends on informed traders' confidence in anticipation based on private information quality and informed traders psychologies and abilities.