Research seminar by Dmitriy Muravyev (University of Illinois at Urbana-Champaign): «Order Flow and Expected Option Returns»

On Tuesday, December 20 at 4.30 pm International College of Economics and Finance held Research seminar.
Speaker: Dmitriy Muravyev (University of Illinois at Urbana-Champaign)
Theme: «Order Flow and Expected Option Returns»
Venue: Pokrovski Bulvar, 11, Room Zh-822

Abstact: Inventory considerations play a first order role in determining expected option returns. This point is supported by three main results. First, position rollover during the expiration period creates large selling pressure which leads to a 5.7% drop in prices for non-expiring options. Expiration dates create exogenous variation in order imbalance, which in turn can explain the “abnormal” expiration returns. Second, as implied by the inventory channel, individual and market-wide order imbalances predict future option returns primarily through future order imbalances. The past imbalances are the most significant predictors of future returns controlling for a large battery of observable variables. One standard deviation increase in the inventory-related order imbalance corresponds to 1% higher expected option returns on the next day. Finally, we develop a microstructure method to decompose the price impact of trades into inventory and information components. Inventory has a bigger price impact than information for any trade size.

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