The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00348
Allen M. Poteshman
This paper investigates options market reaction to changes in the instantaneous variance of the underlying asset. There are three main findings. First, options market investors underreact to individual daily changes in instantaneous variance. Second, these same investors overreact to periods of mostly increasing or mostly decreasing daily changes in instantaneous variance. Third, they tend to underreact (overreact) to current daily changes in instantaneous variance that are preceded mostly by daily changes of the opposite (same) sign. The third finding can reconcile the first two and is also consistent with well‐established cognitive biases.
Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options
Published: 02/12/2003 | DOI: 10.1111/1540-6261.00518
Allen M. Poteshman, Vitaly Serbin
This paper analyzes the early exercise of exchange‐traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of fullservice brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Rational and irrational exercise is triggered for discount and full‐service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock.
Volatility Information Trading in the Option Market
Published: 05/09/2008 | DOI: 10.1111/j.1540-6261.2008.01352.x
SOPHIE X. NI, JUN PAN, ALLEN M. POTESHMAN
This paper investigates informed trading on stock volatility in the option market. We construct non‐market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.