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Title page for ETD etd-08142006-234632

Type of Document Dissertation
Author Pool, Veronika Krepely
URN etd-08142006-234632
Title Essays in Liquidity and Trading Activity
Degree PhD
Department Management
Advisory Committee
Advisor Name Title
Hans Stoll Committee Co-Chair
  • Finance
  • Liquidity
  • Option Volume
  • Volatility
Date of Defense 2006-06-26
Availability unrestricted
Three separate issues are studied in the three chapters of this thesis in connection with liquidity and trading activity in financial markets. The first chapter investigates whether price discovery in the option market is enhanced on heavy option volume days. I find that it is; more specifically, when option volume is high, implied volatilities are more informative. This is consistent with the idea that on average, abnormal trading represents information induced trading, rather than behavioral biases. The result is invariant to controlling for trading frictions that may affect the choices of informed traders. The second chapter extends the volume-volatility literature and documents that on average, surprise option volume is significantly positively related to stock volatility. Moreover, a significant portion of the cross-sectional variation in the relation is explained by firm and market characteristics that describe information asymmetry. Thus, my findings are consistent with the Mixture of Distribution hypothesis, and I conclude that that the impact of option trading reflects informed trading in the option market. The third chapter studies stock liquidity in an asset pricing context. I find that the positive risk-return relation is restored once the empirical specification includes liquidity. Hence; the failure to account for liquidity could explain the mixed results in previous empirical studies.
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