Predictable Stock Returns, Transaction Costs, and the (Un)Informativeness of Option Prices

63 Pages Posted: 9 Aug 2016 Last revised: 16 Apr 2020

See all articles by Luis Goncalves-Pinto

Luis Goncalves-Pinto

University of New South Wales (UNSW); Chinese University of Hong Kong (CUHK)

Jing Xu

Renmin University of China - School of Finance

Date Written: April 16, 2020

Abstract

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

Goncalves-Pinto, Luis and Xu, Jing, Predictable Stock Returns, Transaction Costs, and the (Un)Informativeness of Option Prices (April 16, 2020). 29th Australasian Finance and Banking Conference 2016, Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=2820422 or http://dx.doi.org/10.2139/ssrn.2820422

Luis Goncalves-Pinto (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://luis.goncalvespinto.com/

Chinese University of Hong Kong (CUHK) ( email )

Cheng Yu Tung Building
Shatin
Hong Kong
Hong Kong

Jing Xu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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