Do Option Traders on Value and Growth Stocks React Differently to New Information?

21 Pages Posted: 7 Jan 2008

See all articles by Wei He

Wei He

University of Texas of the Permian Basin - School of Business

Yen-Sheng Lee

University of New Orleans, College of Business Administration, Department of Economics and Finance

Peihwang Wei

University of New Orleans - College of Business Administration - Department of Economics and Finance

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

He, Wei and Lee, Yen-Sheng and Wei, Peihwang, Do Option Traders on Value and Growth Stocks React Differently to New Information? (August 15, 2007). Available at SSRN: https://ssrn.com/abstract=1081363 or http://dx.doi.org/10.2139/ssrn.1081363

Wei He

University of Texas of the Permian Basin - School of Business ( email )

Odessa, TX 79762
United States

Yen-Sheng Lee (Contact Author)

University of New Orleans, College of Business Administration, Department of Economics and Finance ( email )

New Orleeans, LA
United States

Peihwang Wei

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States
(504) 280-6602 (Phone)

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