Option Market Efficiency and Analyst Recommendations

31 Pages Posted: 13 Jul 2010

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: 2009-12

Abstract

This paper examines the information content in option markets surrounding analyst recommendation changes. The sample includes 6,119 recommendation changes for optionable stocks over the period January 1996 through December 2005. As expected, mean underlying asset returns are positive (negative) on days of recommendation upgrades (downgrades). However, volatility levels and shifts prior to recommendation changes explain a significant portion of underlying asset price responses. Ex-ante price and volatility responses in option markets are linked to increased jump uncertainty risk premia. Our findings suggest information in option markets leads analyst recommendation changes, implying revisions contain less information than previously thought.

Suggested Citation

Doran, James and Fodor, Andy and Krieger, Kevin, Option Market Efficiency and Analyst Recommendations (2009-12). Journal of Business Finance & Accounting, Vol. 37, Issue 5-6, pp. 560-590, June/July 2010, Available at SSRN: https://ssrn.com/abstract=1639216 or http://dx.doi.org/10.1111/j.1468-5957.2010.02189.x

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

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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