The purpose of this paper is to show that the growth of options open interest has predictive power for stock market returns. Predictability is demonstrated through in-sample tests, out-of-sample metrics, and the improvement in Sharpe ratios of returns from a predictor variable-based decision rule. Our empirical evidence indicates that the growth of options open interest predict stock market returns even after controlling for other popular predictor variables.
JEL Classification: C53, G12, G13
Keywords: Options Open Interest, Predictability, Stock market returns
