Informed Trading in the Stock Market and Option-Price Discovery

When activist shareholders file Schedule 13D filings, the average stock-price volatility drops by approximately 10%. Prior to filing days, volatility information is reflected in option prices. Using a comprehensive sample of trades by Schedule 13D filers that reveals on what days and in what markets...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2021-09, Vol.56 (6), p.1945-1984
Main Authors: Collin-Dufresne, Pierre, Fos, Vyacheslav, Muravyev, Dmitry
Format: Article
Language:English
Subjects:
Activists
Disclosure
Institutional investments
Prices
Quantitative analysis
Securities markets
Securities prices
Securities trading
Stock exchanges
Stock prices
Stockholders
Trading
Volatility
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Summary:When activist shareholders file Schedule 13D filings, the average stock-price volatility drops by approximately 10%. Prior to filing days, volatility information is reflected in option prices. Using a comprehensive sample of trades by Schedule 13D filers that reveals on what days and in what markets they trade, we show that on days when activists accumulate shares, option-implied volatility decreases, implied volatility skew increases, and implied volatility time slope increases. The evidence is consistent with a theoretical model where it is common knowledge that informed trading occurs only in the stock market and market makers update option prices based on stock-price and order-flow dynamics.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109020000629