Gkionis, Konstantinos, Kostakis, Alexandros ORCID: 0000-0002-2358-6484, Skiadopoulos, George and Stilger, Przemyslaw S
(2021)
Positive stock information in out-of-the-money option prices.
Journal of Banking and Finance, 128.
p. 106112.
Text
RNS JBF.pdf - Author Accepted Manuscript Download (1MB) | Preview |
Abstract
We examine whether the option market leads the stock market with respect to positive in addition to negative price discovery. We document that out-of-the-money (OTM) option prices, which determine the Risk-Neutral Skewness (RNS) of the underlying stock return's distribution, can embed positive information regarding the underlying stock. A long-only portfolio of stocks with the highest RNS values yields a significant positive alpha in the post-ranking week during the period 1996–2014. This outperformance is mainly driven by stocks that are relatively underpriced but are also exposed to greater downside risk. These findings are consistent with a trading mechanism where investors choose to exploit perceived stock underpricing via OTM options due to their embedded leverage, rather than directly buying the underlying stock to avoid exposure to its potential downside. Due to the absence of severe limits-to-arbitrage for the long-side, the price correction signalled by RNS is very quick, typically overnight.
Item Type: | Article |
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Uncontrolled Keywords: | Option-Implied information, Price discovery, Risk-Neutral skewness, Stock underpricing, Downside risk |
Divisions: | Faculty of Humanities and Social Sciences > School of Management |
Depositing User: | Symplectic Admin |
Date Deposited: | 22 Jun 2021 10:40 |
Last Modified: | 18 Jan 2023 22:33 |
DOI: | 10.1016/j.jbankfin.2021.106112 |
Related URLs: | |
URI: | https://livrepository.liverpool.ac.uk/id/eprint/3127293 |