Predictable Stock Returns, Transaction Costs, and the (Un)Informativeness of Option Prices
63 Pages Posted: 9 Aug 2016 Last revised: 16 Apr 2020
Date Written: April 16, 2020
We show that option prices predict future stock returns only when stock returns are ex-ante predictable using public signals from the stock market itself. Directional option trading cannot explain these results, suggesting that they are not driven by informed trading or superior ability of option traders to process public information. We demonstrate that these empirical findings are consistent with the implications of a rational option pricing model with predictable stock returns and transaction costs. Overall, our results significantly weaken the extent to which the cross-market predictability can be attributed to the informational advantage of option traders.
Keywords: Put-Call Parity, Predictable Stock Returns, Trading Costs, Informed Trading
JEL Classification: G11, G12, C13
Suggested Citation: Suggested Citation