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RFS Advance Access originally published online on March 27, 2008
Review of Financial Studies 2009 22(1):299-335; doi:10.1093/rfs/hhn020
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Differences of Opinion of Public Information and Speculative Trading in Stocks and Options

H. Henry Cao
Cheung Kong Graduate School of Business (CKGSB)

Hui Ou-Yang
Lehman Brothers and CKGSB

Send correspondence to H. Henry Cao, Cheung Kong Graduate School of Business, Beijing 100738, China; e-mail: hncao{at}ckgsb.edu.cn or to Hui Ou-Yang, Lehman Brothers Asia-Pacific Roppongi Hills Mori Towers, 31st Floor, 6-10-1, Roppongi, Minato-Ku, Tokyo 106-6131, Japan; e-mail: houyang{at}lehman.com.

JEL Classification: G1, G11, G12


  Abstract

We analyze the effects of differences of opinion on the dynamics of trading volume in stocks and options. We find that disagreements about the mean of the current- and next-period public information lead to trading in stocks in the current period but have no effect on options trading. Without options, we find that disagreements about the precision of all past and current public information affect trading in stocks in the current period. With options, only disagreements about the precisions of the next- and current-period information affect stocks and options trading in the current period. Our results suggest that options trading is concentrated around information events that are likely to cause disagreements among investors, whereas trading in stocks may be diffusive over many periods.

We are very grateful to an anonymous referee for offering many insightful comments and suggestions that have improved the article immensely. We also thank Kerry Back, Pete Kyle, Haitao Li, S. Viswanathan, Wei Xiong, and seminar participants at Cheung Kong, Duke, Houston, Indiana, NYU, Oklahoma, Tulane, and UNC, the 2005 American Finance Association Meetings, the 2005 Western Finance Association Meetings, and the 2004 China International Finance Conference for helpful comments.


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