Volume 12, Number 2, December 2017
| The Impact of Different Investors’ Net Buying Pressure on Implied Volatility |
Abstract
This study uses unique TAIEX options data which it divides into all traders and different types of traders to investigate the impact of net buying pressure on implied volatility when the final settlement price in the contracts system changes. In addition, this paper examines whether there is evidence of a leverage effect or an information flow effect. It is found that the shape of the implied volatility function exhibits a volatility smile. This result shows that the implied volatility is not only affected by the trading of the option, but is also affected by the net buying pressure caused by the ATM call, ATM put, OTM call and OTM put. Our overall empirical results reveal that institutional investors provide support for the limits-to-arbitrage hypothesis, which means that they exploit their private information in the options market to earn profits.
Keywords: Net Buying Pressure, Implied Volatility, Limits-to-Arbitrage Hypothesis, Learning Hypothesis, Leverage Effect, Information Flow Effect
JEL Classification: G11, G14, G15, H31