Do Option-Based Measures of Stock Mispricing Find Investment Opportunities or Market Frictions?

49 Pages Posted: 22 Mar 2019 Last revised: 20 Dec 2019

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Paul Schultz

University of Notre Dame

Stephen Szaura

McGill University - Desautels Faculty of Management

Date Written: March 5, 2019

Abstract

This paper considers a plethora of option-based measures of stock mispricing introduced by previous literature. These measures are based on differences between implied and actual stock prices, differences in implied volatilities across options, and on option trading volume. We show that stocks that these measures indicate are mispriced are small and/or hard to borrow. When small and hard-to-borrow stocks are omitted, returns to short selling are insignificant for some of the measures and greatly diminished for others. Three of the nine measures, however, predict positive abnormal stock returns for value-weighted portfolios without obvious market frictions, suggesting that they constitute investment opportunities.

Keywords: options implied stock prices, expiration risk, stock return predictability

JEL Classification: G14

Suggested Citation

Cremers, K. J. Martijn and Goyenko, Ruslan and Schultz, Paul and Szaura, Stephen, Do Option-Based Measures of Stock Mispricing Find Investment Opportunities or Market Frictions? (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3347194 or http://dx.doi.org/10.2139/ssrn.3347194

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Paul Schultz

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Stephen Szaura

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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