Abstract

http://ssrn.com/abstract=984491
 
 

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Straddle Option Profitability in Corporate Lawsuits


Erica A. Wind


Colorado College - Department of Economics and Business

Judith A. Laux


Colorado College - Department of Economics and Business

May 2007

Colorado College Working Paper No. 2007-03

Abstract:     
The current study investigates whether abnormal returns may be gained by purchasing a straddle position prior to a verdict or settlement announcement in a lawsuit. The basis for the hypothesis stems from behavioral finance - more specifically, the Overreaction Hypothesis. Using CAPM expected rates of return and comparisons of 31 lawsuit firms' straddle returns, three new straddle trading strategies are devised. Within the sample of lawsuits, abnormal returns are evident for the three strategies. The results and their implications support behavioral finance and the Overreaction Hypothesis and thus refute the Efficient Markets Hypothesis.

Number of Pages in PDF File: 13

Keywords: straddle, lawsuit, CAPM, overreaction hypothesis, efficient markets

JEL Classification: G14, K2

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Date posted: May 7, 2007  

Suggested Citation

Wind, Erica A. and Laux, Judith A., Straddle Option Profitability in Corporate Lawsuits (May 2007). Available at SSRN: http://ssrn.com/abstract=984491 or http://dx.doi.org/10.2139/ssrn.984491

Contact Information

Erica A. Wind
Colorado College - Department of Economics and Business ( email )
Colorado Springs, CO 80903
United States
719-389-6927 (Fax)
Judith A. Laux (Contact Author)
Colorado College - Department of Economics and Business ( email )
Colorado Springs, CO 80903
United States
7193896414 (Phone)
7193896927 (Fax)
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