We find that weekend, holiday and overnight trading breaks generate excessive perceived risk in the option markets, presumably due to asymmetric information, which, in turn, encourages uninformed option traders to postpone trading. This perceived risk subsides after two days accompanied by an increase in the option trading volume and the underlying index's actual price volatility. These results shed light on the informational role of index options and suggest that the theoretical models' results regarding information processing and price discovery in the presence of private information are not limited to single stocks but also apply to the market as a whole.
|Number of pages||15|
|Journal||Journal of Banking and Finance|
|State||Published - 1 Sep 2015|
Bibliographical noteFunding Information:
This paper has benefited from the helpful comments and suggestions of the anonymous referee as well as the participants in the European Finance Association Meeting, Cambridge University, the Asset Pricing and Corporate Finance Workshop, University of Glasgow, and the Hebrew University seminar. We thank the Standard & Poor’s Dow Jones Indices and the Surveys of Consumers, University of Michigan, for providing us with relevant data. We thank the Kruger Center for Finance of the Hebrew University for its financial support.
© 2015 Elsevier B.V.
- Asymmetrical information
- Implied volatility
- Market efficiency
- Option market microstructure
- Perceived risk
- Volume of trade