Price-to-Earnings Ratios and Option Prices

Journal of Futures Markets, Forthcoming

28 Pages Posted: 9 Feb 2015

See all articles by Ansley Chua

Ansley Chua

Kansas State University

Jared DeLisle

Utah State University

Sze-Shiang Feng

Synchrony Financial

Bong‐Soo Lee

Florida State University

Date Written: October 24, 2014

Abstract

In May of 1997, in the midst of the internet bubble, the average month end P/E ratio for the software industry was 44. However, the five year historical average was 31. In this study we examine the effect of this industry value fluctuation on the effects of option prices. We examine the relationship between the level of relative valuation and option pricing via deviations in put-call parity and a two factor option pricing model incorporating relative valuation. We find support that the increase in relative industry valuation Granger causes put-call parity deviations, implying investors price options with greater expectation of downward movement. Additionally, we develop a model and find support that the two factor option pricing model which incorporates relative industry valuation prices options better than the standard Black-Scholes (1973) model.

Keywords: Option pricing model, price-to-earnings ratios, market efficiency

JEL Classification: G10, G12, G13, G14

Suggested Citation

Chua, Ansley and DeLisle, Jared and Feng, Sze-Shiang and Lee, Bong Soo, Price-to-Earnings Ratios and Option Prices (October 24, 2014). Journal of Futures Markets, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2562140

Ansley Chua (Contact Author)

Kansas State University ( email )

Manhattan, KS 66506-4001
United States

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Sze-Shiang Feng

Synchrony Financial ( email )

Kettering, OK 45420
United States

Bong Soo Lee

Florida State University ( email )

Tallahasse, FL 32306
United States

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