Option trading after the opening bell and intraday stock return predictability

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option-to-stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.     

Portfolio constraints,differences in beliefs and bubbles

I propose an arbitrage-based theory of bubbles in economies with general portfolio constraints and differences in beliefs. I find that, in general, bubbles cannot exist unless the constraints restrict the demand for credit sufficiently to induce low interest rates. Speculation due to heterogeneous beliefs does not cause bubbles. Ruling out bubbles under asymmetric information requires stronger assumptions: the presence of some uninformed agents and mild portfolio restrictions (debt or borrowing constraints), or alternatively, the existence of some impatient and fully informed agents.     

Decision-making in incomplete markets with ambiguity—a case study of a gas field acquisition

We apply utility indifference pricing to solve a contingent claim problem, valuing a connected pair of gas fields where the underlying process is not standard Geometric Brownian Motion and the assumption of complete markets is not fulfilled. First, empirical data are often characterized by time-varying volatility and fat tails; therefore, we use Gaussian generalized autoregressive score (GAS) and GARCH models, extending them to Student’s t-GARCH and t-GAS. Second, an important risk (reservoir size) is not hedgeable. As a result, markets are incomplete which makes preference free pricing impossible and thus standard option pricing methodology inapplicable. Therefore, we parametrize the investor’s risk preference and use utility indifference pricing techniques. We use Least Squares Monte Carlo simulations as a dimension reduction technique in solving the resulting stochastic dynamic programming problems. Moreover, an investor often only has an approximate idea of the true probabilistic model underlying variables, making model ambiguity a relevant problem. We show empirically how model ambiguity affects project values, and importantly, how option values change as model ambiguity gets resolved in later phases of the projects. We show that traditional valuation approaches will consistently underestimate the value of project flexibility and in general lead to overly conservative investment decisions in the presence of time-dependent stochastic structures.     

What Drives Executive Stock Option Backdating?

We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight. We find that smaller, younger and less profitable firms tend to be more heavily involved in backdating. These results are consistent with the retention hypothesis. In line with the incentive hypothesis, we find that backdating occurs more for options that are out‐of‐the‐money. We derive some evidence for the agency hypothesis, in the sense that backdating companies have a larger percentage of inside directors. However, contrary to this hypothesis, we conclude that backdating firms have better protection for minority shareholders compared to firms that do not backdate.     

An analytical approximation formula for European option pricing under a new stochastic volatility model with regime-switching

In this paper, an analytical approximation formula for pricing European options is obtained under a newly proposed hybrid model with the volatility of volatility in the Heston model following a Markov chain, the adoption of which is motivated by the empirical evidence of the existence of regime-switching in real markets. We first derive the coupled PDE (partial differential equation) system that governs the European option price, which is solved with the perturbation method. It should be noted that the newly derived formula is fast and easy to implement with only normal distribution function involved, and numerical experiments confirm that our formula could provide quite accurate option prices, especially for relatively short-tenor ones. Finally, empirical studies are carried out to show the superiority of our model based on S&P 500 returns and options with the time to expiry less than one month.     

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.     

Reserves and cash flows under stochastic retirement

Uncertain time of retirement and uncertain structure of retirement benefits are risk factors for life insurance companies. Nevertheless, classical life insurance models assume these are deterministic. In this paper, we include the risk from stochastic time of retirement and stochastic benefit structure in a classical finite-state Markov model for a life insurance contract. We include discontinuities in the distribution of the retirement time. First, we derive formulas for appropriate scaling of the benefits according to the time of retirement and discuss the link between the scaling and the guarantees provided. Stochastic retirement creates a need to rethink the construction of disability products for high ages and ways to handle this are discussed. We show how to calculate market reserves and how to use modified transition probabilities to calculate expected cash flows without significantly more complexity than in the traditional model. At last, we demonstrate the impact of stochastic retirement on market reserves and expected cash flow in numerical examples.     

Pricing vulnerable options with correlated jump-diffusion processes depending on various states of the economy

In this paper, we use a Markov-modulated regime switching approach to model various states of the economy, and study the pricing of vulnerable European options when the dynamics of the underlying asset value and the asset value of the counterparty follow two correlated jump-diffusion processes under regime switching. The correlation is modelled by both the diffusion parts and the pure jump parts which describe the uncertainty of the value of the risky assets. We develop a method to determine an equivalent martingale measure and a parsimonious representation of the risk-neutral density is provided. Based on this, we derive an analytical pricing formula for vulnerable options via two-dimensional Laplace transforms, and implement the formula through numerical Laplace inversion.     

期权思想在项目评估中的应用

传统的现金流折现项目评估法由于没有考虑企业在项目投产后进一步决策的权利,可能会使企业错过应有的投资机会或承担不必要的投资风险。在引入放弃价值和放弃期权后,可以大大改善企业对投资项目的评估效果。同时,放弃期权对投资项目有着价值提升和风险规避的作用。