Abstract

http://ssrn.com/abstract=1787365
 
 

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Stock Options as Lotteries


Brian H. Boyer


Brigham Young University - J. Willard and Alice S. Marriott School of Management

Keith Vorkink


Brigham Young University - J. Willard and Alice S. Marriott School of Management

June 20, 2013

Journal of Finance, Forthcoming

Abstract:     
We investigate the relationship between ex-ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness should be priced. We find, consistent with recent theory, that total skewness exhibits a strong and negative relationship with average option returns. The differences in average returns between low and high skewed options is large, ranging from 10 to 50 per cent per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgable risk when accommodating the relatively high investor demand for lottery-like options.

Number of Pages in PDF File: 57

Keywords: options, skewness, behavioral finance

JEL Classification: G12, G13

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Date posted: March 18, 2011 ; Last revised: June 21, 2013

Suggested Citation

Boyer, Brian H. and Vorkink, Keith, Stock Options as Lotteries (June 20, 2013). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1787365 or http://dx.doi.org/10.2139/ssrn.1787365

Contact Information

Brian H. Boyer (Contact Author)
Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )
Provo, UT 84602
United States
Keith Vorkink
Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )
Provo, UT 84602
United States
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