Option Characteristics as Cross-sectional Predictors

Andreas Neuhierl; Xiaoxiao Tang; Rasmus T. Varneskov; Guofu Zhou

Option Characteristics as Cross-sectional Predictors

Andreas Neuhierl, Xiaoxiao Tang, Rasmus T. Varneskov, Guofu Zhou

Department of Finance

Research output: Contribution to conference › Conference abstract for conference › Research › peer-review

Abstract

We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.

Original language	English
Publication date	2023
Publication status	Published - 2023
Event	ASSA 2023 Annual Meeting - Hilton Riverside, New Orleans, United States Duration: 6 Jan 2023 → 8 Jan 2023 https://www.aeaweb.org/conference/2023

Conference

Conference	ASSA 2023 Annual Meeting
Location	Hilton Riverside
Country/Territory	United States
City	New Orleans
Period	06/01/2023 → 08/01/2023
Internet address	https://www.aeaweb.org/conference/2023

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https://www.aeaweb.org/conference/2023/program?q=eNpNjbEOwjAMRP_FcwY6dOk3MFwiVmQ1lmrRNJHtFlVV_h2ngMT27uy7O0AJZZxgOJxUOS-3vdCfhAE6qAFQNY8uIICRJKc7ykL6zJtbn5YrXCc2bWFcXG3K8phR7VewMb3aKZIhzxRPP4CU4tRf2kvE_bvAiRrV-gYFXTOB#Licence: Unspecified

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Neuhierl, A., Tang, X., Varneskov, R. T., & Zhou, G. (2023). Option Characteristics as Cross-sectional Predictors. Abstract from ASSA 2023 Annual Meeting, New Orleans, Louisiana, United States. https://www.aeaweb.org/conference/2023/program?q=eNpNjbEOwjAMRP_FcwY6dOk3MFwiVmQ1lmrRNJHtFlVV_h2ngMT27uy7O0AJZZxgOJxUOS-3vdCfhAE6qAFQNY8uIICRJKc7ykL6zJtbn5YrXCc2bWFcXG3K8phR7VewMb3aKZIhzxRPP4CU4tRf2kvE_bvAiRrV-gYFXTOB#

@conference{e680e7fd57434e0cb322fbfaf7bbb7f2,

title = "Option Characteristics as Cross-sectional Predictors",

abstract = "We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.",

author = "Andreas Neuhierl and Xiaoxiao Tang and Varneskov, {Rasmus T.} and Guofu Zhou",

year = "2023",

language = "English",

note = "ASSA 2023 Annual Meeting ; Conference date: 06-01-2023 Through 08-01-2023",

url = "https://www.aeaweb.org/conference/2023",

}

Neuhierl, A, Tang, X, Varneskov, RT & Zhou, G 2023, 'Option Characteristics as Cross-sectional Predictors', ASSA 2023 Annual Meeting, New Orleans, United States, 06/01/2023 - 08/01/2023. <https://www.aeaweb.org/conference/2023/program?q=eNpNjbEOwjAMRP_FcwY6dOk3MFwiVmQ1lmrRNJHtFlVV_h2ngMT27uy7O0AJZZxgOJxUOS-3vdCfhAE6qAFQNY8uIICRJKc7ykL6zJtbn5YrXCc2bWFcXG3K8phR7VewMb3aKZIhzxRPP4CU4tRf2kvE_bvAiRrV-gYFXTOB#>

TY - ABST

T1 - Option Characteristics as Cross-sectional Predictors

AU - Neuhierl, Andreas

AU - Tang, Xiaoxiao

AU - Varneskov, Rasmus T.

AU - Zhou, Guofu

PY - 2023

Y1 - 2023

N2 - We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.

AB - We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.

M3 - Conference abstract for conference

T2 - ASSA 2023 Annual Meeting

Y2 - 6 January 2023 through 8 January 2023

ER -