Investor Attention and Option Returns
60 Pages Posted: 20 Mar 2018 Last revised: 16 Jun 2020
Date Written: June 15, 2020
By extending Kumar, Ruenzi and Ungeheuer (2018), we examine whether the attention-induced overpricing spills over from the stock market to the options market. While they find an increasing buying pressure from retail investors when the stock achieves an attention-grabbing status in the form of a daily winner or loser, we establish that option investors (especially retail investors) buy more calls and puts on such winner or loser stocks. The buying pressure leads to a temporary overvaluation evidenced by subsequent lower delta-hedged returns. The economic magnitude is large. For instance, a zero-financing portfolio involving options on loser stocks renders an alpha of 2.906% per month. Instead of short-sale constraints, the overvaluation of options is due to a combination of margin requirements, differences of opinion, and risk-aversion.
Keywords: Investor attention, daily winners and losers, salience, overpricing, option returns
JEL Classification: G14
Suggested Citation: Suggested Citation