Ex-Ante Portfolio Design with Ex-Post Public Information : An Empirical Examination of the Information Content of Equity Open Interests

This paper examines the ability of equity open interests from options markets to forecast underlying stock price for the maturity date and to examine if the forecast prices can be used as a guide to design trading rules. GMM estimation method is used on a set of widely held stocks from US financial market. In a panel data of three consecutive months, our regression results do not reject the null hypothesis of equal coefficients across months. Next, these coefficients are used to forecast ex-ante stock prices for the following three months for the same set of securities. Then these forecast prices are used as a guide to design portfolio strategies. Portfolios are designed with and without options. When options are used, no short selling is allowed. Portfolio results are significant compared to the simple buy-hold strategies and compared to the Samp;P 500 index return for the same period. Our findings also support that choice of derivatives in portfolio designs can be timely and efficient. Results of our research should be considered as a support for a financial variable, called open interest, in the financial market as a potential source of information. Even though, this variable is a public information, it may offer evidence of markets with differential information