How the 52-Week High and Low Affect Option-Implied Volatilities and Stock Return Moments
Tilburg University - Department of Finance; CentER Tilburg University
University of Hong Kong - Faculty of Business and Economics
Otto Van Hemert
IMC Asset Management
July 8, 2011
Review of Finance, Forthcoming
We provide a new perspective on option and stock price behavior around 52-week highs and lows. We analyze whether option-implied volatilities change when stock prices approach or break through their 52-week high or low. We also study the effects of highs and lows on a stock's beta and return volatility. We find that implied volatilities and stock betas decrease when approaching a high or low, and that volatilities increase after breakthroughs. The effects are economically large and significant. The approach results can be explained by the anchoring theory. The breakthrough results are consistent with anchoring and the investor attention hypothesis.
Number of Pages in PDF File: 47
Keywords: 52-week high, 52-week low, implied volatility, beta, volatility, anchoring, prospect theory, investor attention, barrier, support level, resistance level
JEL Classification: G12, G14
Date posted: March 22, 2010 ; Last revised: July 9, 2011
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