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Fundamental Analysis and Option Returns

47 Pages Posted: 21 Dec 2011 Last revised: 3 Jan 2013

Theodore H. Goodman

Purdue University - Department of Accounting

Monica Neamtiu

City University of New York (CUNY) - Stan Ross Department of Accountancy

Frank Zhang

Yale School of Management

Date Written: January 3, 2013

Abstract

This paper investigates whether fundamental accounting information is appropriately priced in the options market. We find that fundamental accounting signals exhibit incremental predictive power with respect to future option returns above and beyond what is captured by implied and historical stock volatility, suggesting that the options market does not fully incorporate fundamental information into option prices. Transaction costs substantially reduce the overall profitability of hedge strategies that exploit the information in these fundamental accounting signals, but the strategies still earn economically and statistically significant returns for options with low transaction costs.

Keywords: Fundamental analysis, return, volatility, accounting signals

JEL Classification: G11, G12, G13, G14, M41

Suggested Citation

Goodman, Theodore H. and Neamtiu, Monica and Zhang, Frank, Fundamental Analysis and Option Returns (January 3, 2013). Available at SSRN: https://ssrn.com/abstract=1974753 or http://dx.doi.org/10.2139/ssrn.1974753

Theodore H. Goodman

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Monica Neamtiu

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Frank Zhang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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