Why Do Options Prices Predict Stock Returns? Evidence from Analyst Tipping

Journal of Banking and Finance, Forthcoming

EFA 2013 Cambridge Meetings Paper

WFA 2013 Lake Tahoe Meetings Paper

CICF 2012 Chongqing Meetings Paper

42 Pages Posted: 31 Oct 2012 Last revised: 23 Nov 2014

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xiaolong Lu

The University of Hong Kong - Faculty of Business and Economics

Date Written: September 2014

Abstract

We study the role of analysts and options traders in the information transmission between options and stock markets. We first show that the predictive power of option implied volatilities (IVs) on stock returns more than doubles around analyst-related events, indicating that a significant proportion of the options predictability on stock returns comes from informed options traders’ information about upcoming analyst-related news. We examine three explanations for this finding: tipping, reverse tipping and common information. We find that analyst tipping to options traders is the most consistent explanation of these predictive patterns.

Keywords: Informed traders, analyst tipping, implied volatility spread, implied volatility skew, market liquidity

JEL Classification: G12, G14, G17

Suggested Citation

Lin, Tse-Chun and Lu, Xiaolong, Why Do Options Prices Predict Stock Returns? Evidence from Analyst Tipping (September 2014). Journal of Banking and Finance, Forthcoming; EFA 2013 Cambridge Meetings Paper; WFA 2013 Lake Tahoe Meetings Paper; CICF 2012 Chongqing Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2168566 or http://dx.doi.org/10.2139/ssrn.2168566

Tse-Chun Lin

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

Pokfulam Road
Hong Kong
China

Xiaolong Lu (Contact Author)

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

Rm1122, KK Leung Building
Pokfulam Road
Hong Kong
China

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