Ambiguity in Option Markets — Evidence from SEOs

Journal of Financial Management, Markets and Institutions, Forthcoming

39 Pages Posted: 13 Jun 2015 Last revised: 26 Jun 2017

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Lutz Johanning

WHU - Otto Beisheim School of Management

Umut Ordu

WHU - Otto Beisheim School of Management

Denis Schweizer

Concordia University

Date Written: June 25, 2017

Abstract

Seasoned equity offerings (SEOs) typically provide investors with information, or signals, that are stock price relevant. This information, however, is generally intangible, meaning market participants have incomplete knowledge about its quality. Investors thus tend to regard it as ambiguous. To calculate a related ambiguity premium, we use straddle returns to explore the difference between option-implied and realised volatility following SEO events. After controlling for common risk factors, we find significantly positive alphas that can proxy for the ambiguity premium. In line with previous research, we find that the estimated ambiguity premium is positively correlated with firms’ fundamental data intangibility, as proxied for by the skewness of stock returns.

Keywords: Ambiguity, option-implied information, information tangibility, seasoned equity offerings (SEOs), straddle, volatility trading strategy

JEL Classification: C21, G14, G32

Suggested Citation

Cumming, Douglas J. and Johanning, Lutz and Ordu, Umut and Schweizer, Denis, Ambiguity in Option Markets — Evidence from SEOs (June 25, 2017). Journal of Financial Management, Markets and Institutions, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2617667 or http://dx.doi.org/10.2139/ssrn.2617667

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Lutz Johanning

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509 720 (Phone)

Umut Ordu

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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