Option Information Trading And Return Co-movement Of Cross Listed Stocks

This paper examines the linkage between option information trading and the stock market co-movement of American Depositary Receipts(ADRs).This paper extends the research on the price effect of options on stocks to the international markets,and provides new interpretation of its mechanisms with the help of cross listing framework.It also contributes to the research in cross-listing by introducing important information from the options market.I exploit the daily data of the ADR stocks and their options from January 2005 to December 2017,and construct the panel regression model to study the price effect of option trading on the return of ADRs.The following main conclusions are drawn.First,the study finds that after controlling the spillover effects between the two cross-listed stock markets,the option trading of ADR stocks in the US has very important incremental information about the fundamental value of domestic stocks.Indicators like OS ratio and Call ratio,and open buy put-call ratio all have a very significant predictive ability for the next day's domestic stock returns.Second,the regression results show that the Call Ratio of ADR options has only a significant positive price effect on domestic stocks,and there is a reversal effect in the later period,and it has no significant impact on US stocks.Moreover,the predictive power is found stronger for stocks in developing countries.This indicates that the predictive power of Call ratio is more likely to be related to the inefficiency of information transmission between ADR options and the domestic stock market;while OS ratio and open buy put-call ratio have a significant negative predictive power for both domestic and US stocks with no reversal,and there is no difference in the impact of stocks in developing and developed countries,indicating that its forecasting ability is more likely to be from informed trading in the options market that contains private information not market inefficiency.