Option Characteristics as Cross-Sectional Predictors

59 Pages Posted: 8 Mar 2021 Last revised: 30 Jun 2022

See all articles by Andreas Neuhierl

Andreas Neuhierl

Washington University in St. Louis - John M. Olin Business School

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Rasmus Tangsgaard Varneskov

Copenhagen Business School - Department of Finance; Nordea Bank AB - Nordea Asset Management

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: March 1, 2021

Abstract

We provide the first comprehensive analysis of option information for pricing the cross-section of
stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio
sorts and high-dimensional methods, we show that certain option measures have significant predictive power, even after controlling for firm characteristics, earning a Fama-French three-factor alpha in excess of 20% per annum. Our analysis further reveals that the strongest option characteristics are associated with information about asset mispricing and future tail return realizations. Our findings are consistent with models of informed trading and limits to arbitrage.

Keywords: Asset Pricing, Factor Models, High-dimensional Methods, Option-implied Risk

JEL Classification: C13, C14, G11, G12, G14

Suggested Citation

Neuhierl, Andreas and Tang, Xiaoxiao and Varneskov, Rasmus Tangsgaard and Zhou, Guofu, Option Characteristics as Cross-Sectional Predictors (March 1, 2021). LawFin Working Paper No. 37, Available at SSRN: https://ssrn.com/abstract=3795486 or http://dx.doi.org/10.2139/ssrn.3795486

Andreas Neuhierl (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

St. Louis, MO
United States

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Rasmus Tangsgaard Varneskov

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Nordea Bank AB - Nordea Asset Management ( email )

PO Box 850
Copenhagen, 0900
Denmark

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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