Anomalies, Option Volume, and Disagreement

60 Pages Posted: 28 Sep 2018 Last revised: 17 Sep 2023

See all articles by Allaudeen Hameed

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Byounghyun Jeon

Marquette University

Date Written: September 16, 2023

Abstract

We uncover a significant amplification of short-term anomaly returns when trading volume on stock options is high. Conversely, option volume is unrelated to long-term anomaly returns. We show that the amplification of anomaly returns stems from disagreement-based option volume, reflecting an alignment of the horizon over which biased investor expectation associated with short-term mispricing and investor disagreement is resolved. We establish a plausibly identified link between option volume-based investor disagreement and short-horizon mispricing in stocks, by leveraging the staggered XBRL adoption by firms. Moreover, stocks earn low future returns when preceded by high disagreement-based option volume and
shorting costs, supporting some disagreement models and indicates that high disagreement trades in options do not alleviate shorting constraints.

Keywords: option trading volume, investor disagreement, mispricing, horizon and anomalies

JEL Classification: G12, G13, G14

Suggested Citation

Hameed, Allaudeen and Jeon, Byounghyun, Anomalies, Option Volume, and Disagreement (September 16, 2023). Available at SSRN: https://ssrn.com/abstract=3256061 or http://dx.doi.org/10.2139/ssrn.3256061

Allaudeen Hameed (Contact Author)

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=1

Byounghyun Jeon

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States
414-690-2025 (Phone)

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