Differences in options investors’ expectations and the cross-section of stock returns

Panayiotis Andreou; Anastasios Kagkadis; Dennis Philip; Ruslan Tuneshev

doi:10.1016/j.jbankfin.2018.07.016

Differences in options investors’ expectations and the cross-section of stock returns

Panayiotis Andreou, Anastasios Kagkadis, Dennis Philip, Ruslan Tuneshev

Research output: Contribution to journal › Article › peer-review

Abstract

We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea that IDISP reflects dispersion in investors’ beliefs, we find that the negative IDISP-return relationship is particularly pronounced around earnings announcements, in high sentiment periods and among stocks that exhibit relatively high short-selling impediments. Moreover, the IDISP effect is highly persistent and robustly distinct from the effects of a large array of previously documented cross-sectional return predictors.

Original language	English
Pages (from-to)	315-336
Journal	Journal of Banking & Finance
Volume	94
Early online date	2 Aug 2018
DOIs	https://doi.org/10.1016/j.jbankfin.2018.07.016
Publication status	Published - Sept 2018

Keywords

Dispersion of beliefs
Disagreement in options market
Cross-section of stock returns
Equity options
Option trading volume

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10.1016/j.jbankfin.2018.07.016

Andreou_2018_JBF_stockreturns_AAM
© 2018 Elsevier B.V. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at: https://doi.org/10.1016/j.jbankfin.2018.07.016
Accepted author manuscript, 1.16 MBLicence: CC BY-NC-ND

Ruslan Tuneshev
- rt65st-andrews.acuk
- Finance (Business School) - Lecturer
Person: Academic

Cite this

@article{de61f72cddee4f69bebf7bc356bb18d1,

title = "Differences in options investors{\textquoteright} expectations and the cross-section of stock returns",

abstract = "We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea that IDISP reflects dispersion in investors{\textquoteright} beliefs, we find that the negative IDISP-return relationship is particularly pronounced around earnings announcements, in high sentiment periods and among stocks that exhibit relatively high short-selling impediments. Moreover, the IDISP effect is highly persistent and robustly distinct from the effects of a large array of previously documented cross-sectional return predictors.",

keywords = "Dispersion of beliefs, Disagreement in options market, Cross-section of stock returns, Equity options, Option trading volume",

author = "Panayiotis Andreou and Anastasios Kagkadis and Dennis Philip and Ruslan Tuneshev",

year = "2018",

month = sep,

doi = "10.1016/j.jbankfin.2018.07.016",

language = "English",

volume = "94",

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journal = "Journal of Banking & Finance",

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AU - Andreou, Panayiotis

AU - Kagkadis, Anastasios

AU - Philip, Dennis

AU - Tuneshev, Ruslan

PY - 2018/9

Y1 - 2018/9

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AB - We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea that IDISP reflects dispersion in investors’ beliefs, we find that the negative IDISP-return relationship is particularly pronounced around earnings announcements, in high sentiment periods and among stocks that exhibit relatively high short-selling impediments. Moreover, the IDISP effect is highly persistent and robustly distinct from the effects of a large array of previously documented cross-sectional return predictors.

KW - Dispersion of beliefs

KW - Disagreement in options market

KW - Cross-section of stock returns

KW - Equity options

KW - Option trading volume

U2 - 10.1016/j.jbankfin.2018.07.016

DO - 10.1016/j.jbankfin.2018.07.016

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SP - 315

EP - 336

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

ER -

Differences in options investors’ expectations and the cross-section of stock returns

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Ruslan Tuneshev

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