Overreaction to Stock Market News and Misevaluation of Stock Prices by Unsophisticated Investors: Evidence from the Option Market
39 Pages Posted: 7 Jul 2004
Date Written: November 21, 2004
Abstract
This paper examines option activity on value and growth stocks before earnings announcements. The main finding is that unsophisticated investors enter option positions that load up on growth stocks relative to value stocks in the days leading up to earnings announcements. This occurs despite the fact that at earnings announcements value stocks outperform growth stocks by a wide margin. The paper's results provide evidence that unsophisticated option market investors (1) overreact to past news on underlying stocks and (2) mistakenly believe that mispriced stocks will move even further away from fundamentals at impending scheduled news releases.
Keywords: overreaction, value versus growth, option market, unsophisticated investors
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Information in Option Volume for Stock Prices
By Allen M. Poteshman and Jun Pan
-
The Information of Option Volume for Future Stock Prices
By Allen M. Poteshman and Jun Pan
-
Informational Content of Option Volume Prior to Takeovers
By Charles Cao, John M. Griffin, ...
-
The Informational Role of Stock and Option Volume
By Kalok Chan, Y. Peter Chung, ...
-
Information, Trade, and Derivative Securities
By Michael J. Brennan and H. Henry Cao
-
Deviations from Put-Call Parity and Stock Return Predictability
By Martijn Cremers and David Weinbaum
-
Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market
By Young-hye Cho and Robert F. Engle
-
Who Buys and Sells Options: The Role and Pricing of Options in an Economy with Background Risk
By Gunter Franke, Richard C. Stapleton, ...