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Patrick Augustin awarded 2016 CME Group Foundation Grant: "Detecting Informed Trading in Illiquid Option Markets"

Published: 8 April 2016

This research grant is awarded jointly toÌýPatrick Augustin (¶Ù±ð²õ²¹³Ü³Ù±ð±ô²õ),ÌýGunnar Grass (HEC Montreal),ÌýMarti G. Subrahmanyam,ÌýCharles E. Merril (New York Stern School of Business)

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In this project, we propose a framework for identifying option trades that maximize expected returns under liquidityÌýconstraints for investors with private but noisy information. Our primary objective is to improve the detection ofÌýillegal insider trading by understanding how insiders can benefit from trading differentially depending on the typeÌýand quality of their private information, i.e., the precision of its signal. We first implement our approach numericallyÌýfor a wide range of option trading strategies and various private signals and then apply it empirically to documentÌýsuspicious activity in option markets prior to large changes in stock prices associated with different types ofÌýcorporate news events. In most instances, an investor with a private signal about an upcoming change in the price ofÌýthe underlying stock maximizes his profits by acquiring options trading near the money, or by pursuing tradingÌýstrategies involving more than one security. Differences in trading as a function of signal and parameter uncertaintyÌýimprove our understanding of how informed investors trade in the options market.

is interested in encouraging academic research on exchange-traded derivatives and central clearing house policy issues. The Foundation Board has identified the following topics as those of greater interest within three broad-based categories of research: Exchange-Traded Derivative Market Activity; Structure of Derivative Markets; Global Regulation of Derivative Markets. Ìý

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