The Information Imbedded in the Trading Volume of Currency Options

Yaffa MachnesGraduate School of Business AdministrationBar Ilan UniversityISRAEL

Email: machny@mail.biu.ac.ilfax: 03-5353182 Tel: 08-9468544

References • Anthony, J.H. (1988). The interrelation of stock and option

market trading-volume data. Journal of Finance, 43, 949-961.

• Chakravarty, S., Gulen, H., & Mayhew, S. (2004). Informed trading in stock and option markets. Journal of Finance, June; 59(3): 1235-57.

• Easley, D., O'Hara, M., & Srinivas, P. S. (1998). Option volume and stock prices: Evidence on where informed traders trade. Journal of Finance, 53, 431-465.

• Sarwar, G. (2003). The interrelation of price volatility and trading volume of currency options. The Journal of Futures Markets, 23(7), 681-700.

The Model

R it - "representative" exchange rate on day t

cV ti - total volume of calls on US $ traded in TASE on day t

pVti - total volume of puts on US $ traded in TASE on day t

/pPCR cV Vt tti ii

1 2 pR ( )

c0R ( )V V(1) ln ln ln t

i t mit it

i t k

0 1 2pR ( )

R ( )VVc PCR(2) ln ln ln titit it

i t m

i t k

Table 1: Exchange Rate as a Function of Trading Volume of $ US Options: Augmented Dickey-Fuller Test Equation. Least Squares Method after logarithmic transformation. Regression coefficients multiplied by 10 .

Explanatory variable

On the trading day

Previous trading day

Constant-71.6(4.3)

-33.2(2.5)

Calls volume19.9(6.2)

8.8(3.3)

Puts volume-13.6(5.2)

-5.8(1.9)

F-statistics19.118.9

R squared0.040.01

n9641189

Durbin Watson

1.931.90

Numbers in parenthesis are t values

4

Table 2: Exchange Rate as a Function of PCR and Trading Volume of $ US Options: Augmented Dickey-Fuller Test Equation. Least Squares Method after logarithmic transformation. Regression coefficients multiplied by 10 .

Explanatory variable

On the trading day

Previous trading day

Constant-74.7(4.3)

-33.5(2.3)

Calls+puts volume

6.2(3.7)

2.9(2.1)

Put/call ratio

-15.3(5.7)

-6.5(2.9)

F5.45.2

R squared0.040.01

n9641189

Durbin-Watson

1.931.98

Numbers in parenthesis are t values

4