Information Content of Option Prices: Comparing Analyst Forecasts to Option-Based Forecasts

43 Pages Posted: 27 Jun 2019 Last revised: 1 Apr 2021

Date Written: June 25, 2019

Abstract

Finance theory dictates that public information is incorporated in asset pricing expectations. Empirical research suggests that not all return forecasts are equal. Do different forecasts weigh information differently? This paper decomposes the information content of option and analyst forecasts. The results show that analyst forecasts are constructed using a wide-spectrum of market and firm-level data while option-based forecasts capture measures of uncertainty. Further, we revisit the question of whether analyst forecast dispersion is a proxy for uncertainty. We find a negative relationship between analyst disagreement and option-based forecasts, indicating that option traders view analyst disagreement as a source of uncertainty.

Keywords: asset pricing, recovery theorem, analyst, forecast, financial economics

JEL Classification: G00, G1, G12

Suggested Citation

Sanford, Anthony, Information Content of Option Prices: Comparing Analyst Forecasts to Option-Based Forecasts (June 25, 2019). Available at SSRN: https://ssrn.com/abstract=3300120 or http://dx.doi.org/10.2139/ssrn.3300120

Anthony Sanford (Contact Author)

University of Maryland ( email )

4113AA Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://www.terpconnect.umd.edu/~sanfoan/

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