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How the 52-Week High and Low Affect Option-Implied Volatilities and Stock Return Moments

Review of Finance, Forthcoming

47 Pages Posted: 22 Mar 2010 Last revised: 9 Jul 2011

Joost Driessen

Tilburg University - Department of Finance; CentER Tilburg University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Otto Van Hemert

Man AHL

Date Written: July 8, 2011

Abstract

We provide a new perspective on option and stock price behavior around 52-week highs and lows. We analyze whether option-implied volatilities change when stock prices approach or break through their 52-week high or low. We also study the effects of highs and lows on a stock's beta and return volatility. We find that implied volatilities and stock betas decrease when approaching a high or low, and that volatilities increase after breakthroughs. The effects are economically large and significant. The approach results can be explained by the anchoring theory. The breakthrough results are consistent with anchoring and the investor attention hypothesis.

Keywords: 52-week high, 52-week low, implied volatility, beta, volatility, anchoring, prospect theory, investor attention, barrier, support level, resistance level

JEL Classification: G12, G14

Suggested Citation

Driessen, Joost and Lin, Tse-Chun and Van Hemert, Otto, How the 52-Week High and Low Affect Option-Implied Volatilities and Stock Return Moments (July 8, 2011). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1572269 or http://dx.doi.org/10.2139/ssrn.1572269

Joost Driessen (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CentER Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Otto Van Hemert

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

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