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| Author | : Yigit Atilgan |
| Publisher | : |
| Total Pages | : 196 |
| Release | : 2010 |
| Genre | : Options (Finance) |
| ISBN | : |
| Author | : Mishuk Anwar Chowdhury |
| Publisher | : |
| Total Pages | : |
| Release | : 2012 |
| Genre | : Fear |
| ISBN | : |
This dissertation consists of three essays. The first essay tests whether stock returns can be predicted using divergence from put-call parity. Using a robust methodology that controls for the early exercise premium of American put and call options, the study shows that stocks with upside divergence from put-call parity outperform stocks with downside divergence from put-call parity. Predictability is persistent over multiple holding periods and divergence is also predictive of tail events. The second essay examines segmentation of equity and option markets in the presence of information asymmetry. The study uses the slope of the implied volatility skew as a proxy for negative jump risk, option implied stock price as a measure of deviation from put-call parity, and the daily short-sell volume ratio as a measure of negative information flow in the equity market. The option market based signals predict future returns more reliably than the short-sell based signals. Short-sellers only profit when their convictions line-up with negative signals in the option market. The third essay introduces a measure of fear derived from the implied volatility smile. The study examines the relationship between fear and the cross section of option returns. The results show that put options written on stocks with high fear premium outperform put options written on stocks with low fear premium. Fear does not predict the realization of a tail event. This finding confirms the irrational nature of fear.
| Author | : Volodymyr Zdorovtsov |
| Publisher | : |
| Total Pages | : 222 |
| Release | : 2004 |
| Genre | : |
| ISBN | : |
| Author | : Asad Dossani |
| Publisher | : |
| Total Pages | : 140 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
This dissertation consists of three chapters that analyze the economic information contained in option markets. Option markets are forward looking, and thus contain valuable insight into the beliefs of financial market participants. They can be used to study risk premia and to make forecasts. The Chapter 1, Central Bank Tone and Currency Risk Premia, asks how the tone of central bank press conferences impacts risk premia in the currency market. First, I find that option implied risk aversion increases when central banks are hawkish, and decreases when central banks are dovish. Second, I find that hawkish central bank tone predicts higher future variance risk premia, and vice versa. One explanation for this result is that the tone of a press conference indicates to investors the likelihood of central bank intervention, conditional on the state of the economy. Chapter 2, Monetary Stimulus and Perception of Risk, investigates the relationship between monetary stimulus and the perception of risk in financial markets, and how this varies across asset classes. First, I document a positive relationship between monetary stimulus and the perception of risk in equity, commodity, and currency markets. I document a negative relationship between monetary stimulus and the perception of risk in bond markets. Second, I establish a cointegrating relationship between monetary stimulus and implied volatility, indicating a positive long run equilibrium relationship in the levels of monetary stimulus and implied volatility. This relationship is present across asset classes. Third, I document the link between monetary stimulus and expected inflation, a possible mechanism by which monetary stimulus affects the perception of risk across financial markets. Chapter 3, Option Augmented Density Forecasts of Market Return with Monotone Pricing Kernel, considers consider an option augmented density forecast of the market return obtained by transforming a baseline density forecast estimated from past excess returns so as to monotonize its ratio with a risk neutral density estimated from current option prices. We find that monotonizing the pricing kernel leads to a modest improvement in the calibration of density forecasts.
| Author | : Mr. Travis Lake Johnson |
| Publisher | : |
| Total Pages | : |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
In the first chapter, my coauthor and I examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket asymmetric information model, equity short-sale costs result in a negative relation between relative option volume and future firm value. In our empirical tests, firms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 0.34% per week (19.3% annualized). Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future firm-specific earnings news, consistent with O/S reflecting private information. In the second chapter, I show that in many asset pricing models, the equity market's expected return is a time-invariant linear function of its conditional variance, which can be estimated from options markets. However, I show that when the relation between conditional means and variances is state-dependent, an observer requires the combined information in multiple variance horizons to distinguish among the states and thereby reveal the equity risk premium. Empirically, I show that while the VIX by itself has little predictive power for future S & P 500 returns, the VIX term structure predicts next-quarter S & P 500 returns with a 5.2% adjusted R-squared.
| Author | : Zekun Wu |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2021 |
| Genre | : |
| ISBN | : |
This dissertation consists of three essays that explore the information content embedded in equity options. The results improve our understanding of the cross-section of option returns, informed trading in the options market, and the industry effect of IPOs. In the first essay, we study the relation between option-implied skewness (IS) and the crosssection of option returns under daily hedging to better understand skewness pricing in isolation from lower moments. Creating portfolios of delta-hedged (D-hedged) and delta-vega-hedged (DV-hedged) options with daily rebalancing, we find that IS is negatively (positively) related to call (put) option returns, but the relation to put options is statistically significant only during economic recessions. The relation is more substantial when the underlying stock has a larger market beta and when the firm has more severe information opacity. Our results suggest that investors' skewness preference grows stronger with greater market risk and lower information quality. In the second essay, we examined the informed trading in the options market before FDA drug advisory committee meetings. We find significant abnormal options trading volume before both meeting dates and report creation dates, particularly for small drug firms. Abnormal volume significantly predicts post-meeting stock returns. Informed traders prefer out-of-the-money options and choose maturities to cover the dates when reports are publicly released. They prefer to sell options close to the meeting date, perhaps to capture returns from both expected stock price changes and the sharp drop in implied volatility post-meeting. In the third essay, I investigate the effect of initial public offerings (IPOs) on industry competitors' options market. I find that rival firms' put (call) options volume increases (decreases) around IPOs, leading to price pressure on call options relative to put options as measured by the implied volatility spread. Rival firms' reaction in the options market also predicts the IPO firms' post-IPO stock performance. Lastly, rival firms with strong operating income experience less negative impact in the options market, suggesting competitive operation performance help stabilize rival firms' options market around IPOs.
| Author | : Jung Hwang |
| Publisher | : |
| Total Pages | : 278 |
| Release | : 2008 |
| Genre | : Portfolio management |
| ISBN | : |
| Author | : Lu Yang |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2023 |
| Genre | : |
| ISBN | : |
This dissertation examines the efficiency with which capital markets process new information. The first chapter focuses on the effects of unexpected news on the equity and options markets. The second chapter examines information flow from mutual fund managers to corporate managers. In Chapter 1, I study how capital markets process information in expected versus unexpected information shocks. For that purpose, I construct a novel measure, based on information in the options markets, that helps to distinguish between expected and unexpected events. I find that unexpected negative jumps are associated with a subsequent negative drift in the stock price, while there is no such effect for expected jumps. A strategy that shorts stocks with an unexpected negative jump and buys those with an expected negative jump generates an annual 4-factor alpha of 12.34\%. I also demonstrate that options become overpriced following unexpected negative jumps. My paper contributes to the literature on anomalies, including momentum and post-earnings announcement drift. In Chapter 2, we show a positive relationship between stock holdings from top active mutual funds and corporate investment, particularly for firms subject to higher information uncertainty. The results suggest that firm managers learn from mutual fund managers and incorporate this information when making investment decisions. To address endogeneity concerns, we exploit a natural experiment, the 2004 SEC Regulation, that increased the reporting frequency of mutual fund portfolio holdings from semiannually to quarterly. As mutual funds' signals become more precise, we show a stronger sensitivity of investment to mutual fund holdings post-2004, particularly for firms with higher information uncertainty and scarcity of information.
| Author | : Gunsu Son |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2023 |
| Genre | : |
| ISBN | : |
Despite structural differences between the options and stock markets, few studies have discussed the behavior and impact of high-frequency traders (HFTs) in the options market. Options exchanges identify high-frequency/algorithmic traders as Professional Customers (PCs). In this study, we use granular data that identifies trades by customers, PCs, and Market Makers (MMs). We find that PCs mainly trade as a counterparty to customers, similar to MMs. However, the liquidity provision by PCs leads to order flow toxicity: PCs use a "cream skimming" strategy that imposes adverse selection costs on MMs. PCs mainly trade with uninformed customers, most likely leveraging their speed and algorithmic advantage. PCs provide less liquidity when the market and stock volatility are high. Customer call option trades made with PCs have one-tenth of price impact and no return or volatility predictability, while there is significant price impact in addition to return and volatility predictability when executed against MMs during the next 30 minutes. Our finding on HFTs' non-arbitrage channel of order flow toxicity is new and suggests that the role of HFTs should be better understood in the context of the options market structure.
| Author | : Sereno Stansbury Pratt |
| Publisher | : |
| Total Pages | : 322 |
| Release | : 1908 |
| Genre | : Securities industry |
| ISBN | : |
