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A Study of Call Price Behavior under a Stationary Return Generating Process
Author(s) -
Chang S. J.,
Chen SonNan
Publication year - 1989
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1989.tb00346.x
Subject(s) - econometrics , robustness (evolution) , dividend , computer science , earnings , process (computing) , dividend yield , call option , economics , dividend policy , finance , biochemistry , chemistry , gene , operating system
Conventional event study methodologies that require a stationary return generating process are generally not applicable to option studies because options are known to have constantly changing risk‐reward characteristics over time. Nevertheless, this paper attempts to analyze call price behavior in response to earnings and dividend surprises using the mean‐adjusted return method and the cumulative sum method; both methods assume stationarity. With proper risk‐neutralizing modifications along with careful specification of the test design, we were able to overcome the difficulty of such time‐dependent methodologies. The empirical results show the robustness of the method across calls of different maturities and exercise prices.