Gambling preference and individual equity option returns

We investigate the relation between the option returns and the underlying stock's lottery like characteristics. Call options written on the most lottery-like stocks underperform otherwise similar call options written on the least lottery-like stocks by 10-20% per month. Moreover, the more lottery-like the underlying stocks, the further and more frequently the options deviate from the put-call parity in the direction induced by overvalued calls. Furthermore, the lottery-like characteristic effect is stronger during periods of high investor sentiment. The results suggest that optimism-induced gambling preference causes lottery like options to be overvalued. (C) 2016 Elsevier B.V. All rights reserved
Publisher
ELSEVIER SCIENCE SA
Issue Date
2016-10
Language
ENG
Keywords

EXPECTED STOCK RETURNS; INVESTOR SENTIMENT; CROSS-SECTION; SKEWNESS PREFERENCE; SHORT SALES; MARKET; RISK; LOTTERIES; VOLATILITY; ARBITRAGE

Citation

JOURNAL OF FINANCIAL ECONOMICS, v.122, no.1, pp.155 - 174

ISSN
0304-405X
DOI
10.1016/j.jfineco.2016.06.004
URI
http://hdl.handle.net/10203/213931
Appears in Collection
MT-Journal Papers(저널논문)
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