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Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

61 Pages Posted: 21 Aug 2001  

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Vitaly Serbin

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

This paper analyzes the early exercise of Chicago Board Options Exchange listed calls by different classes of investors over the 1996-1999 period. We present two main findings. First, there are a large number of early exercises that can be identified as clearly irrational without invoking any model of market equilibrium, and these exercises are not uniformly distributed across the investor classes. Customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Second, irrational exercise is triggered both by the underlying stock price attaining its highest level over the past year and by the underlying stock having high past returns. Our findings provide evidence that prospect theory is operative in the options market and that it applies differentially across various classes of investors.

Keywords: Market Efficiency, Behavioral Finance, Early Exercise, Irrational Behavior, Prospect Theory

Suggested Citation

Poteshman, Allen M. and Serbin, Vitaly, Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options (August 2001). Available at SSRN: https://ssrn.com/abstract=280795 or http://dx.doi.org/10.2139/ssrn.280795

Allen M. Poteshman (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

Vitaly A. Serbin

affiliation not provided to SSRN

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