Anomalies, Option Volume, and Disagreement

Abstract

We document robust amplification of stock market anomaly returns associated with elevated option trading volume driven by disagreement trades. Consistent with the correction of mispricing associated with biased beliefs, anomaly returns are higher when disagreement option volume is high prior to earnings announcements. Additionally, we demonstrate that disagreement-based option volume is negatively related to future stock returns among stocks which are overpriced based on anomaly characteristics. Our findings also concentrate in stocks that are also difficult to short, emphasizing the combined impact of investor bias and shorting costs. Leveraging the staggered adoption of XBRL, we establish a plausibly identified link between investor disagreement and short-horizon mispricing in stocks. 

Keywords: Anomalies, Mispricing, Option trading volume, Investor disagreement

JEL Classification: G12, G13, G14