Abstract

http://ssrn.com/abstract=2288910
 
 

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Call Options, Preferences for Lotteries, and the Stability of Underlying Stock Prices


Benjamin M. Blau


Utah State University - Huntsman School of Business

T. Boone Bowles


Utah State University

Ryan J. Whitby


Utah State University

July 2, 2013


Abstract:     
Despite assumptions of mean-variance efficiency that underlie most asset pricing models, investors have shown a penchant for lottery-type stocks or stocks that exhibit skewness in returns. In this paper, we test whether the proportion of option trading volume made up from call options (i.e. the call ratio) is greater for stocks with return distributions that resemble lotteries. We find that call ratios are highest for stocks with lottery characteristics, suggesting that investors’ preferences for lottery-type stocks might be reflected in the level of call option volume. Perhaps, more importantly, we test whether these preferences affect future spot price volatility. Consistent with our expectation, we find that preferences for lotteries by call option traders directly affect future spot price volatility. To the extent that higher call ratios in lottery-type stocks represent speculative activity in the options market, these results are consistent with theory in Stein (1987), which posits that speculative trading activity in the derivatives market can lead to increased volatility.

Number of Pages in PDF File: 38

Keywords: options, lotteries, volatility

JEL Classification: G10, G14, G19

working papers series


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Date posted: July 3, 2013  

Suggested Citation

Blau, Benjamin M. and Bowles, T. Boone and Whitby, Ryan J., Call Options, Preferences for Lotteries, and the Stability of Underlying Stock Prices (July 2, 2013). Available at SSRN: http://ssrn.com/abstract=2288910 or http://dx.doi.org/10.2139/ssrn.2288910

Contact Information

Benjamin M. Blau (Contact Author)
Utah State University - Huntsman School of Business ( email )
3500 Old Main Hill
Logan, UT 84322
United States
T. Boone Bowles
Utah State University ( email )
Logan, UT 84322
United States
Ryan J. Whitby
Utah State University ( email )
3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)
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