Option characteristics as cross-sectional predictors

Andreas Neuhierl, Xiaoxiao Tang, Rasmus Tangsgaard Varneskov and Guofu Zhou

No 37, LawFin Working Paper Series from Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)

Abstract: We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.

Keywords: Asset Pricing; Factor Models; High-dimensional Methods; Option Characteristics (search for similar items in EconPapers)
JEL-codes: C13 C14 G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:lawfin:37

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