A Closer Look at the Disposition Effect in U.S. Equity Option Markets
Journal of Behavioral Finance, Vol. 21, 66-77.
31 Pages Posted: 21 Jun 2016 Last revised: 27 Mar 2020
Date Written: March 16, 2019
Abstract
Our study explores whether the disposition effect occurs in U.S. equity option markets. The disposition effect implies past winning securities will be undervalued and past losing securities will be overvalued. By adapting Grinblatt and Han’s [2005] unrealized capital gains proxy to the option markets, we document a significant relationship between option capital gains overhang (OCGO) and option returns. We also find open interest decreases as OCGO increases, consistent with a disposition effect in U.S. equity options. This evidence contributes to the emerging literature on behavioral finance in derivative securities.
Keywords: Disposition effect, options, behavioral finance, reference price.
JEL Classification: G12, G13
Suggested Citation: Suggested Citation