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Is options trading informed? Evidence from credit rating change announcements
Author(s) -
Zhang Jun
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22022
Subject(s) - predictability , credit rating , business , bond credit rating , event study , sample (material) , actuarial science , credit risk , credit reference , biology , chemistry , chromatography , paleontology , context (archaeology) , physics , quantum mechanics
Using a sample of proactive credit rating changes, this study examines the information content of options trading before news events. Pre‐event informed options trading predicts cumulative abnormal returns around credit rating change announcements. The predictability of options trading is more pronounced before announcements of more severe and surprising rating changes. Moreover, the information content of pre‐event options trading is greater when the pre‐event underlying stock market is less informational, when the options market is more liquid, and in the post–regulation fair disclosure period. Overall results are consistent with informed options trading before credit rating change announcements.