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http://hdl.handle.net/2451/26884
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| Title: | Margin Rules, Informed Trading in Derivatives, and Price Dynamics |
| Authors: | JOHN, Kose
KOTICHA, Apoorva
NARAYANAN, Ranga
SUBRAHMANYAM, Marti |
| Issue Date: | Mar-2000 |
| Series/Report no.: | S-DRP-01-05 |
| Abstract: | We analyze the impact of option trading and margin rules on the behavior
of informed traders and on the microstructure of stock and option
markets. In the absence of binding margin requirements, the introduction
of an options market causes informed traders to exhibit a relative
trading bias towards the stock because of its greater information
sensitivity. In turn, this widens the stock's bid-ask spread. But when
informed traders are subject to margin requirements, their bias towards
the stock is enhanced or mitigated depending on the leverage provided by
the option relative to the stock, leading to wider or narrower stock
bid-ask spreads. The introduction of option trading, with or without
margin requirements, unambiguously improves the informational efficiency
of stock prices. Margin rules improve market efficiency when stock and
option margins are sufficiently large or small but not when they are of
moderate size. |
| URI: | http://hdl.handle.net/2451/26884 |
| Appears in Collections: | Derivatives Research
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