Essay on asset pricing

• Main Author: GAO, Fei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Options; Volume; Stock return predictability; Center of mass; ETF; Information; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/etd_coll/168; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1168&context=etd_coll
• Institution: Singapore Management University

We uncover a novel stock return predictor from the options market, the volume-weighted strike-spot price ratio (VWKS) across all traded option contracts. High (low) VWKS indicates that the mass of options volume on an underlying stock centers at the out-of-the-money region of call (put) options. Empirically, VWKS has positive and robust predictive ability for underlying returns after controlling for a long list of variables including known return predictors from the options market, stock illiquidity, and past stock returns, and has more persistent and stronger predictive power for stocks with higher information asymmetry and arbitrage costs. We also find that VWKS exhibits abnormal run-ups and becomes more informative before permanent but not transitory price jumps, suggesting that options traders exploit only fundamental information. Finally, VWKS significantly predicts the merger premium in an event study.