Abstract

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

Starting from the assumption that investors with an important piece of nonpublic information prefer dealing in options, this paper investigates whether there is some indication that call option prices lead stock prices. For a sample of firms listed at the Frankfurter Wertpapierbörse the null hypothesis is tested that there is no extraordinary overpricing (underpricing) of call options relative to their theoretical values during periods preceding intervals of positive (negative) abnormal performance in the stock market. This hypothesis of the study is specified in great detail in the first part of the paper. In the second part of the article the statistical test and the test results are described. For positive abnormal performance the null hypothesis can be rejected; this may be due to insiders buying calls in advance of expected stock price increases. This result does also not support the view that options trading has a destabilising impact on the underlying asset market. At the end of the paper possible further research using option market data from the Deutsche Terminbörse is discussed in detail.