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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Option Mispricing around Nontrading Periods
Published: 12/16/2017 | DOI: 10.1111/jofi.12603
CHRISTOPHER S. JONES, JOSHUA SHEMESH
We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but rather are the result of widespread and highly persistent option mispricing driven by the incorrect treatment of stock return variance during periods of market closure. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.