Abstract
This study investigates the relationship between option market activity and cash market volatility on the OMX index. Option market activity is defined as trading volume divided by open interest and is assumed to reflect the specific impact of speculation. The study contributes by investigating empirical evidence relating to two periods with different market conditions. The findings show that for the complete sample period there is unidirectional causality from cash market volatility to option market activity for calls and puts jointly, as well as for calls and puts respectively. While unidirectional causality from cash market volatility to call option market activity is documented for both the subperiods, bilateral causality between put option market activity and cash market volatility was found for one of the subperiods. Finally, to further investigate the potential impact of index options on the volatility of the underlying cash market the expected and unexpected components of option market activity, trading volume, and open interest were also investigated.
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