“Trading Activity in the Equity Market and Its Contingent Claims: An Empirical Investigation” by Avanidhar Subrahmanyam
Little is known about the joint dynamics of volume across contingent claims. We study the time-series of trading activity in the cash S&P 500 index and its derivatives (options, the legacy and E-mini futures contracts, and the ETF), and consider their dynamic relation with the macroeconomy, over a long time-period of more than 3000 trading days. Legacy futures volume has trended downward while other series have trended upward. Total futures volume has shown an upward trend, suggesting that the trading in the E-mini contract has at least partially supplanted that in the legacy contract. All series are highly cross-correlated and jointly dependent. Signed and absolute trading activity in contingent claims (most prominently, options) predicts shifts in aggregate state variables such as the short rate, and the term and credit spreads, as well as signed and absolute returns around major macroeconomic announcements. Overall, options markets appear to play the strongest informational role, in that options volume innovations seem to have the strongest forecasting ability for fluctuations in the macroeconomic environment.