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Options-implied information and the momentum cycle

Ming-Yu Liu, Wen-I Chuang and Chien-Ling Lo

Journal of Financial Markets, 2021, vol. 53, issue C

Abstract: We employ options-implied information derived from implied volatility spreads and implied volatility skews to identify the momentum stage of stocks. We show that the early-stage (late-stage) momentum strategy of buying identified early-stage (late-stage) winners and selling identified early-stage (late-stage) losers outperforms (underperforms) the conventional momentum strategy of buying winners and selling losers across all momentum stages. We also find that the price momentum of the early-stage (late-stage) momentum strategy experiences slower (faster) reversal than that of the conventional momentum strategy. The outperformance of the early-stage momentum strategy comes primarily from the contribution of losers, as options-implied measures better place losers in their momentum stages than winners. Moreover, the identification ability of options-implied measures increases with the informativeness of the options market and, more importantly, is driven by their predictive information about a firm’s fundamentals, particularly for profitability. Overall, our results indicate that options-implied information is useful in identifying the momentum stages of stocks.

Keywords: Momentum stage; Options-implied information; Implied volatility spread and skew; Early- and late-stage momentum strategies (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100565

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