Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market | Zendy

Luis Goncalves-Pinto | Zendy; Bruce D. Grundy | Zendy; Allaudeen Hameed | Zendy; Thijs van der Heijden | Zendy; Yichao Zhu | Zendy

AI Assistant Blog Pricing

Home ZAIA Blog

Open Access

Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market

Author(s) -

Luis Goncalves-Pinto,

Bruce D. Grundy,

Allaudeen Hameed,

Thijs van der Heijden,

Yichao Zhu

Publication year - 2020

Publication title -

management science

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.954

H-Index - 255

eISSN - 1526-5501

pISSN - 0025-1909

DOI - 10.1287/mnsc.2019.3398

Subject(s) - predictability , cost price , stock (firearms) , economics , restricted stock , non qualified stock option , stock market bubble , financial economics , stock price , stock market , market maker , econometrics , mathematics , mechanical engineering , paleontology , horse , series (stratigraphy) , engineering , biology , statistics

Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.

Having issues? You can contact us here

Accelerating Research