Karen:
Yes, it's also a good paper. From what I understand of the two papers' histories, they were originallyquite similar. But Jayaraman et.al. got published before the Arnold et. al. paper. So, Arnold et. al. added a lot more analysis and send their paper in a slightly different direction (i.e. the emphasis on the "most profitable to trade with private info" contract) to distinguish their work from Jayaraman's.
Yes, an interesting topic. Another paper on this is:
Jayaraman, Frye & Sabherwal, 2001, 'Informed trading around merger announcements: An empirical test using transaction volume and open interest in options market', The Financial Review, vol. 36, no. 2, p. 45.
I believe that Seyhun did look at options around takeovers (but I'm not sure, and I haven't had enough coffee to turn on that second brain cell yet).
But the big contribution to the Arnold et. al. paper is that pre-takover increases in options trading volume could be due to either speculation (i.e. driven by rumors, and not really by individuals having solid information ) or to true "insider" trading (i.e. trades made by those in on the deal and trying to capitalize on private info).
Of all the options trading for the target firm, Arnold and Company identify the one contract that would have the highest profit to trade in if you had knowledge of the offer. They find that THIS option is the one that has the spike in trading.
I thought Nejat Seyhun documented the profitability of options trading by insiders before?
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