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Option trade volume and volatility of banks’ stock returns
This article focuses on the linkages between the trading activity in option markets and the volatility of their corresponding underlying stocks. More specifically, we try to answer the question of whether the trading volume in the option markets has explanatory power over the volatility of the underlying stocks. We focus on option and stock prices information from 16 large European and US banks between 2004 and 2008. Our results show that option trading volume has explanatory power over returns’ volatility and it is robust after controlling for increased overall volatility and shifts in the volatility regime in the early stages of the crisis. The analysis of this particular linkage is scarce in the existing literature and almost non-existent for the European banking sector.