Following the Footprints: Towards a Taxonomy of the Factor Zoo

90 Pages Posted: 12 Feb 2024 Last revised: 23 Apr 2024

See all articles by Julian Böll

Julian Böll

Karlsruhe Institute of Technology

Fanchen Meng

Karlsruhe Institute of Technology

Julian Thimme

Karlsruhe Institute of Technology

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology

Date Written: January 22, 2024

Abstract

Options on individual stocks can be used to trade against mispricings associated with various cross-sectional asset pricing anomalies. Based on this insight, we propose an option volume implied mispricing score (OVIMS) that is supposed to gauge the degree to which an anomaly is linked to stock mispricing. Anomalies in the categories of "momentum'' and "profitability'' are consistently found among those with high mispricing scores. We replicate stock positions with options and find large price wedges between option-implied synthetic and physical stock positions for anomalies characterized by high OVIMS. These disparities suggest that sophisticated traders strategically employ options to trade against prevailing stock mispricings. For certain high OVIMS anomalies, we find empirical evidence that the demand for options is driven by proprietary traders of financial institutions. Furthermore, our findings indicate that traders build option positions particularly during periods of heightened market frictions, where mispricing is particularly pronounced.

Keywords: Asset pricing, anomalies, mispricing, options

JEL Classification: G11, G12, G14

Suggested Citation

Böll, Julian and Meng, Fanchen and Thimme, Julian and Uhrig-Homburg, Marliese, Following the Footprints: Towards a Taxonomy of the Factor Zoo (January 22, 2024). Available at SSRN: https://ssrn.com/abstract=4702435 or http://dx.doi.org/10.2139/ssrn.4702435

Julian Böll

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, DE Baden-Württemberg 76131
Germany

Fanchen Meng

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Julian Thimme (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://www.julianthimme.de

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology ( email )

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