Attention on Volatility and Options

62 Pages Posted: 17 Sep 2013 Last revised: 5 Apr 2017

See all articles by Yan Xu

Yan Xu

HKU, Faculty of Business and Economics

Shu Yan

Oklahoma State University - Stillwater - Department of Finance

Yuzhao Zhang

Rutgers, The State University of New Jersey - Department of Finance

Date Written: March 15, 2017

Abstract

We document a positive and persistent relation between retail investor attention, as measured by Google search volume, and future realized stock return volatility. The relation implies a profitable option trading strategy of purchasing high attention delta-neutral straddles and selling low attention delta-neutral straddles; this strategy earns a significant weekly return of 2.36% and is uncorrelated with common risk factors as well as the firm level variance risk premium. Examination of option trading activities of different investor groups following increased Google search shows that retail option investors benefit most from increasing stock volatility. Our evidence strongly supports theories of noise trader risk.

Keywords: Google search volume, investor attention, volatility, option trading, option pricing

JEL Classification: G12, G13, G14

Suggested Citation

Xu, Yan and Yan, Shu and Zhang, Yuzhao, Attention on Volatility and Options (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2326185 or http://dx.doi.org/10.2139/ssrn.2326185

Yan Xu

HKU, Faculty of Business and Economics ( email )

Pok Fu Lam Road
Hong Kong
Hong Kong

Shu Yan

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Yuzhao Zhang (Contact Author)

Rutgers, The State University of New Jersey - Department of Finance ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

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