Option Traders, Pricing Signals and Stock Returns
16 Jan 2024
13:15 -14:30
Times are shown in local time.
Open to: All
Room W4.05 (Cambridge Judge Business School)
Trumpington St
Cambridge
CB2 1AG
United Kingdom
Join our Finance seminar
Speaker: Dr Xiao Xiao, City University of London
About the seminar topic
The literature has shown several pricing signals that are informative about future stock returns at daily frequency. Using signed option data, we document that customer option traders position themselves into these signals actively. Among the stocks that customer option-traders trade along with the signals, the abnormal return of a long-short portfolio that buys underpriced stocks and sells overpriced stocks is 7.31 basis points per day, and among the stocks that customer option traders trade against the signals, the abnormal return is insignificant.
This effect is more pronounced for out-of-money options. The correction of mispricing occurs when other institutional investors copycat the trades of customer option-traders and when the market makers of options trading hedge their exposures. Our evidence is consistent with the notion that option traders act as arbitragers in determining stock returns.
Speaker bio
Dr Xiao Xiao is a Reader in Finance at Bayes Business School, City University of London. Her primary research interests include empirical asset pricing, derivatives, and institutional investors. Her research has been published in leading academic journals, such as Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Management Science.
She has received funding and research grants from the Canadian Derivatives Institute. She teaches financial markets and investments to MBA students, and asset pricing to PhD students. From 2020 to 2022, she was an assistant professor in finance at Amsterdam Business School, University of Amsterdam. She holds a PhD in Finance from Erasmus University Rotterdam.
Register
No registration required. If you have any questions about this seminar, please email Nigel Low.