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.
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.