Do Option Traders on Value and Growth Stocks React Differently to New Information?
21 Pages Posted: 7 Jan 2008
Date Written: August 15, 2007
Abstract
This paper compares the changes in implied volatilities of options on Nasdaq 100 and Russell 2000 value and growth portfolios. Following Stein (1989) and Heynen, Kemna, and Vorst's (1994), we assume mean reversion, GARCH and EGARCH models for volatility. The empirical evidence using put options indicates a greater degree of overreaction or mis-reaction in options on growth indices as proxied by Nasdaq 100 and Russell 2000 growth compared to options on Russell 2000 value. However, the results are mixed for the relatively illiquid calls. The results have implications for the value stock effect; specifically, they are largely supportive of the overreaction hypothesis as one potential explanation for the value stock effect.
Keywords: implied volatility, overreactions, value and growth stocks
JEL Classification: G11, G13
Suggested Citation: Suggested Citation
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