Option Market Signals and the Disposition Effect Around Equity Earnings Announcements

Adam C. Harper and Salil K. Sarkar

Journal of Behavioral Finance, 2019, vol. 20, issue 4, 471-489

Abstract: The authors provide evidence that equity traders who miss or ignore signals from the options market have an increased disposition to hold their loser positions following earnings announcements. Postearnings equity returns that (do not) align with pre-earnings options market signals are fast (slow) to return to ordinary levels. We attribute this to the disposition effect arising from overconfident traders. The authors furthermore show an enhanced positive relationship between postearnings equity returns and option-implied volatility spreads when those spreads are driven by deep out-of-the-money options, which we attribute to the existence of private information.

Date: 2019
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DOI: 10.1080/15427560.2019.1575385

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