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Option measures and stock characteristics

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  • Sheng, Hainan

Abstract

An extensive existing literature demonstrates that various option measures (e.g., option-to-stock trading volume ratio) exhibit return predictability in the cross section of stocks. Exploring the fundamental nature and robustness of these findings, we investigate whether this previously identified return predictability of option measures is highly associated with the characteristics or attributes of the underlying stock. We find that the return predictability of option measures is heavily impacted by a subset of stocks whose characteristics also predict future returns, thus providing evidence that stock characteristics are one of the main channels through which option measures capture informed trading.

Suggested Citation

  • Sheng, Hainan, 2022. "Option measures and stock characteristics," Finance Research Letters, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:finlet:v:44:y:2022:i:c:s1544612321001392
    DOI: 10.1016/j.frl.2021.102058
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    References listed on IDEAS

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    1. Ge, Li & Lin, Tse-Chun & Pearson, Neil D., 2016. "Why does the option to stock volume ratio predict stock returns?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 601-622.
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    4. George D. Cashman & David M. Harrison & Hainan Sheng, 2021. "Option Trading and REIT Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 332-389, March.
    5. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
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    9. Tarun Chordia & Sahn-Wook Huh & Avanidhar Subrahmanyam, 2007. "The Cross-Section of Expected Trading Activity," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 709-740.
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    Cited by:

    1. Cashman, George D. & Harrison, David M. & Sheng, Hainan, 2022. "Short sales, short risk, and return predictability in Asia-Pacific real estate markets," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    2. Fan, Qingqian & Feng, Sixian, 2022. "An empirical study on the characterization of implied volatility and pricing in the Chinese option market," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Option measures; Return predictability; Stock characteristics;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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