Intraday option price changes and net buying pressure

ABSTRACT

We re-examine the effect of net buying pressure on options-implied volatility changes by analysing ultra-high-frequency microstructure data. Intraday relationships between option price dynamics and investors’ net demand are explained by the direction-learning hypothesis.

KEYWORDS:

• Direction-learning
• option-implied volatility
• net buying pressure
• ultra-high-frequency data

JEL CLASSIFICATION:

• G13
• G14
• G15

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For robustness, we consider i) less parsimonious dynamic specifications (e.g., specifications with some autoregressive distributed lag terms), ii) intraday seasonality in the dependent variable, and iii) market microstructure effects (e.g., the possible autocorrelation due to slow trading; the discreteness in price changes). We therefore incorporate lagged spot returns, spot trading volumes, and futures order imbalances in the regression. We also consider the logarithm of trading volumes. To control for intraday patterns and serial correlation in implied volatilities, we also create six dummy variables to capture intraday trading periods. Additionally, we construct the trading speed, size of traded orders, bid-ask spread, and market depth as liquidity proxies. Our conclusions remain the same when we use these alternative specifications.

Additional information

Funding

This work was supported by the National Research Foundation of Korea (NRF) grant funded by the Korea government (MSIT; Ministry of Science and ICT) [No. 2019R1G1A1100196] and the Dongguk University Research Fund of 2019.