Following the Footprints: Towards a Taxonomy of the Factor Zoo

Abstract

Options on individual stocks provide a tool for trading against mispricings linked to cross-sectional asset pricing anomalies. Higher option volume in mispriced stocks goes hand in hand with a greater concentration of stock anomalies among stocks with high option volume. We introduce the Anomaly Concentration Spread (ACS), a novel option volume-implied measure, which we argue is informative about the extent to which an anomaly reflects cross-sectional variation in stock mispricing. Our findings show that anomaly signals related to volatility, momentum, and profitability exhibit high ACS values, suggesting that these anomalies stem from stock mispricing.

Keywords: Asset pricing, anomalies, mispricing, options

JEL Classification: G11, G12, G14