Volatility Discovery Across Stock Limit Order Book and Options Markets

Authors

  • Qin Wang

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    1. Qin Wang is an Assistant Professor of Finance, College of Business, University of Michigan–Dearborn
    • Correspondence author, College of Business, University of Michigan–Dearborn, Fairlane Center South, 19000 Hubbard Drive, Dearborn, MI 48126-2638. Tel: +313-583-6487, Fax: +313-271-9837, e-mail: qinw@umich.edu

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  • I thank Thierry Foucault, Kenneth Kavajecz, Chris Lamoureux (dissertation chair), Nitish Ranjan Sinha (2011 FMA Discussant), Erik Theissen, Bob Webb (the editor), one anonymous referee, and seminar participants at the University of Arizona, California State University Fullerton, the Office of the Comptroller of the Currency - Risk Analysis Division, University of Michigan-Dearborn, State University of New York at Albany, and Oakland University for helpful comments and suggestions. I thank the financial support from University of Michigan – Dearborn for obtaining the data used in this paper. Finally, I thank Yufang Xia, Moxin Wang, Jun Zhang, and Elena ZhangWang for support.

Abstract

Foucault [Journal of Financial Markets, 2, 99–134, 1999] provides a theoretical basis for how stock price volatility influences the aggressiveness of limit order traders. I investigate volatility discovery across stock limit order book and options markets using a broad panel of NYSE-listed stocks from November 2007 to January 2008 and find strong evidence that, as predicted, the aggressiveness of the stock limit order book and option volatility trading Granger-cause each other. Further, I find that the aggressiveness of the stock limit order book and option volatility trading are inversely related, which is both statistically and economically significant. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:934–956, 2014

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