Abstract

Insider Trading in the Call Options Market - An Empirical Study (Part I)

Starting from the assumption that investors with an important piece of nonpublic information prefer dealing in options, this paper investigates for a sample of firms listed at the Frankfurter Wertpapierbörse whether there is some indication that call option prices lead stock prices. In the first part of this paper existing empirical studies of the relation between option and stock markets are categorized. The special approach of this study is then placed in one of the described categories. Further on the author discusses several arguments supporting the assumption that dealing in options is especially advantageous to insiders. For the later development of the test scenario and a meaningful interpretation of the test results it is also very important to discuss the factors that might determine the intensity of potential insider activity in the option market. At the end of this first part of the article the hypothesis of the study is specified in great detail. The statistical test and the test results will be described in the second part of the paper.