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Essays in Liquidity and Trading Activity

Three separate issues are studied in the three chapters of this thesis in connection with liquidity and trading activity in financial markets. The first chapter investigates whether price discovery in the option market is enhanced on heavy option volume days. I find that it is; more specifically, when option volume is high, implied volatilities are more informative. This is consistent with the idea that on average, abnormal trading represents information induced trading, rather than behavioral biases. The result is invariant to controlling for trading frictions that may affect the choices of informed traders. The second chapter extends the volume-volatility literature and documents that on average, surprise option volume is significantly positively related to stock volatility. Moreover, a significant portion of the cross-sectional variation in the relation is explained by firm and market characteristics that describe information asymmetry. Thus, my findings are consistent with the Mixture of Distribution hypothesis, and I conclude that that the impact of option trading reflects informed trading in the option market. The third chapter studies stock liquidity in an asset pricing context. I find that the positive risk-return relation is restored once the empirical specification includes liquidity. Hence; the failure to account for liquidity could explain the mixed results in previous empirical studies.

Identiferoai:union.ndltd.org:VANDERBILT/oai:VANDERBILTETD:etd-08142006-234632
Date17 August 2006
CreatorsPool, Veronika Krepely
ContributorsHans Stoll
PublisherVANDERBILT
Source SetsVanderbilt University Theses
LanguageEnglish
Detected LanguageEnglish
Typetext
Formatapplication/pdf
Sourcehttp://etd.library.vanderbilt.edu/available/etd-08142006-234632/
Rightsunrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to Vanderbilt University or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report.

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