Deviations from Put-Call Parity and Stock Return Predictability

2010 ◽  
Vol 45 (2) ◽  
pp. 335-367 ◽  
Author(s):  
Martijn Cremers ◽  
David Weinbaum
Keyword(s):  
Stock Returns ◽  
Implied Volatility ◽  
Option Prices ◽  
Stock Return Predictability ◽  
Put Options ◽  
Short Sale Constraints ◽  
Short Sale ◽  
The Difference ◽  
Underlying Stocks ◽  
Abnormal Performance

AbstractDeviations from put-call parity contain information about future stock returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations, we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 50 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, which cannot be explained by short sale constraints. Rebate rates from the stock lending market directly confirm that our findings are not driven by stocks that are hard to borrow. The degree of predictability is larger when option liquidity is high and stock liquidity low, while there is little predictability when the opposite is true. Controlling for size, option prices are more likely to deviate from strict put-call parity when underlying stocks face more information risk. The degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.

Implied Volatility of the KOSPI 200 Index Option Market

2015 ◽  
Vol 23 (4) ◽  
pp. 517-541
Author(s):  
Dam Cho
Keyword(s):  
Financial Crisis ◽  
Trading Volume ◽  
Implied Volatility ◽  
Spot Price ◽  
Strike Price ◽  
Market Pricing ◽  
Put Options ◽  
The Difference ◽  
Index Option ◽  
Option Market

This paper analyzes implied volatilities (IVs), which are computed from trading records of the KOSPI 200 index option market from January 2005 to December 2014, to examine major characteristics of the market pricing behavior. The data includes only daily closing prices of option transactions for which the daily trading volume is larger than 300 contracts. The IV is computed using the Black-Scholes option pricing model. The empirical findings are as follows; Firstly, daily averages of IVs have shown very similar behavior to historical volatilities computed from 60-day returns of the KOSPI 200 index. The correlation coefficient of IV of the ATM call options to historical volatility is 0.8679 and that of the ATM put options is 0.8479. Secondly, when moneyness, which is measured by the ratio of the strike price to the spot price, is very large or very small, IVs of call and put options decrease days to maturity gets longer. This is partial evidence of the jump risk inherent in the stochastic process of the spot price. Thirdly, the moneyness pattern showed heavily skewed shapes of volatility smiles, which was more apparent during the global financial crises period from 2007 to 2009. Behavioral reasons can explain the volatility smiles. When the moneyness is very small, the deep OTM puts are priced relatively higher due to investors’ crash phobia and the deep ITM calls are valued higher due to investors’ overconfidence and confirmation biases. When the moneyness is very large, the deep OTM calls are priced higher due to investors’ hike expectation and the deep ITM puts are valued higher due to overconfidence and confirmation biases. Fourthly, for almost all moneyness classes and for all sub-periods, the IVs of puts are larger than the IVs of calls. Also, the differences of IVs of deep OTM put ranges minus IVs of deep OTM calls, which is known to be a measure of crash phobia or hike expectation, shows consistent positive values for all sub-periods. The difference in the financial crisis period is much bigger than in other periods. This suggests that option traders had a stronger crash phobia in the financial crisis.

The Effect of Short Sale Ban on the Relation between Disagreement and Stock Returns

2015 ◽  
Vol 23 (2) ◽  
pp. 155-182 ◽  
Author(s):  
Jun Sik Kim ◽  
Sung Won Seo
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Abnormal Returns ◽  
The Other ◽  
Exogenous Shock ◽  
Short Sale Constraints ◽  
Short Sale ◽  
Portfolio Returns ◽  
The Future ◽  
The Relationship

This paper investigates the effect of the short sale ban by the Korean government on the relationship between the disagreement among investors and the future stock returns. Short selling in Korean stock market was banned twice in 2008 and 2011. The short sale ban provides a natural experiment environment to study the effect of the short sale constraints on the relationship between the disagreement among investors and the future stock returns. Furthermore, it is an exogenous shock in the point of individual stocks. Thus, this paper focus on short sale ban periods to analyzes the stock return predictability of the disagreement among investors’ opinions about analysts’ earnings forecasts. Main results of this paper are as follows: First, the portfolio within the top 30% of the disagreement among investors experiences the significantly higher returns than that within the bottom 30% of the disagreement only during short sale ban periods. However, the two portfolio returns are not significantly different during the other periods excluding the short sale ban periods. These results are robust even after controlling for firm sizes, boot to market ratios, and the momentum effects. Second, a portfolio with higher the disagreement among investors presents significantly positive abnormal returns estimated by Fama-French’s three factor model during short sale ban periods. On the other hand, the abnormal returns of the portfolio with lower the disagreement among investors are not significantly different from zero. Furthermore, those returns of the portfolio with lower disagreement are not affected by the short sale ban. Finally, our findings show that individual stock returns are positively related to disagreement after controlling for the characteristics of individual stocks. Consequentially, the stocks with higher disagreement are overvalued during the short sale ban periods according to our robust empirical analyses with various control variables. According to our findings, we conclude that the short sale constraints are important factors to determine the predictability of disagreement on future stock returns. These are consistent with the results of short sale ban on the U.S. stock market from Autore, Billingsley, and Kovacs (2011).

scholarly journals Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market

2020 ◽  
Vol 66 (9) ◽  
pp. 3903-3926 ◽  
Author(s):  
Luis Goncalves-Pinto ◽  
Bruce D. Grundy ◽  
Allaudeen Hameed ◽  
Thijs van der Heijden ◽  
Yichao Zhu
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Option Price ◽  
Option Prices ◽  
Options Markets ◽  
Stock Return Predictability ◽  
Price Pressure ◽  
Primary Driver ◽  
Stock Values

Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability. This paper was accepted by Tyler Shumway, finance.

Heterogeneous Beliefs and Momentum Profits

2009 ◽  
Vol 44 (4) ◽  
pp. 795-822 ◽  
Author(s):  
Michela Verardo
Keyword(s):  
Stock Returns ◽  
Information Diffusion ◽  
Theoretical Models ◽  
Analyst Forecasts ◽  
Heterogeneous Beliefs ◽  
Cross Sectional ◽  
Short Sale Constraints ◽  
Short Sale ◽  
Momentum Profits ◽  
Arbitrage Risk

AbstractRecent theoretical models derive return continuation in a setting where investors have heterogeneous beliefs or receive heterogeneous information. This paper tests the link between heterogeneity of beliefs and return continuation in the cross-section of U.S. stock returns. Heterogeneity of beliefs about a firm’s fundamentals is measured by the dispersion in analyst forecasts of earnings. The results show that momentum profits are significantly larger for portfolios characterized by higher heterogeneity of beliefs. Predictive cross-sectional regressions show that heterogeneity of beliefs has a positive effect on return continuation after controlling for a stock’s visibility, the speed of information diffusion, uncertainty about fundamentals, information precision, and volatility. The results in this paper are robust to the potential presence of short-sale constraints and are not explained by arbitrage risk.

scholarly journals Short-sale constraints and stock returns

2002 ◽  
Vol 66 (2-3) ◽  
pp. 207-239 ◽  
Author(s):  
Charles M Jones ◽  
Owen A Lamont
Keyword(s):  
Stock Returns ◽  
Short Sale Constraints ◽  
Short Sale

Structured Products Markets and Implied Volatility Distortion

2014 ◽  
Vol 22 (3) ◽  
pp. 433-464
Author(s):  
Sun-Joong Yoon
Keyword(s):  
Financial Markets ◽  
Rapid Growth ◽  
Implied Volatility ◽  
Policy Implications ◽  
Over The Counter ◽  
Volatility Risk ◽  
Put Options ◽  
Structured Products ◽  
Payoff Structure ◽  
The Difference

This study verifies the existence of implied volatility distortion by the rapid growth of structured products such as Equity Linked Securities (ELS) in Korean financial markets and provides the policy implications to overcome such a distortion. The most ELS products issued in Korea have a step-down auto-callable payoff structure consisting of short position in down-and-in barrier put options and long position in digital call options. Financial companies which have issued ELS are exposed to the volatility risk, i.e. long vega position, and tend to execute the volatility transactions of short vega. For instance, the financial companies issue Equity-Linked Warrants or sell listed/over-the-counter vanilla options, both of which have short position in volatility risk. Accordingly, the demand for selling volatility is stronger than for buying volatility in the Korean financial markets. According to the empirical results, we conform that the rapid growth of the ELS products induces the pressure for lowering volatility and furthermore, the volatility spreads, defined as the difference between implied volatility and realized volatility, also decrease with respect the amount of the newly issued ELS. Lastly, to mitigate the volatility distortion effect, we suggest to list VKOSPI-related derivatives securities such as VKOSPI futures and options, which in turn balance the trading demands for selling and buying volatilities.

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