Option Market Efficiency and Analyst Recommendations

27 Pages Posted: 11 Sep 2008

See all articles by James Doran

James Doran

University of New South Wales

Andy Fodor

Ohio University

Kevin Krieger

University of West Florida

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2008


This paper examines the information content in option prices and volatility surrounding analyst recommendation changes. The sample includes 7,549 recommendation changes of optionable stocks over the period January 1996 to December 2005. As expected, mean underlying asset returns are positive on days of recommendation upgrades and negative on days of recommendation downgrades. However, option volatility prior to recommendation changes can explain a significant portion of corresponding underlying asset price changes. Additionally, forming long straddle positions prior to analyst recommendation changes results in a -16% mean return for downgrades and a -17% mean return for upgrades. Even if the directions of recommendation changes are known, significant returns cannot be earned by taking appropriate long positions in call or put options. Ex-ante price and volatility response in option markets are linked to an increase in jump uncertainty risk premia. The findings suggest information in option market prices and volatility leads analyst recommendation changes, meaning analyst forecast revisions do little to improve market efficiency.

Keywords: Analyst Recommendations, Market Efficiency, Option Returns

JEL Classification: G11, G12

Suggested Citation

Doran, James and Fodor, Andy and Krieger, Kevin, Option Market Efficiency and Analyst Recommendations (September 9, 2008). Available at SSRN: https://ssrn.com/abstract=1265757 or http://dx.doi.org/10.2139/ssrn.1265757

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Kevin Krieger

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

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