David Weinbaum

Deviations from Put-Call Parity and Stock Return Predictability

Deviations from put-call parity contain information about future stock returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations, we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 50 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, which cannot be explained by short sale constraints. Rebate rates from the stock lending market directly confirm that our findings are not driven by stocks that are hard to borrow. The degree of predictability is larger when option liquidity is high and stock liquidity low, while there is little predictability when the opposite is true. Controlling for size, option prices are more likely to deviate from strict put-call parity when underlying stocks face more information risk. The degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.

Assessing the Historical Performance of Hospitality Stocks The Investor's Perspective

This article analyzes the historical performance of hospitality stocks, taking into account the magnitude and timing of investor capital flows in and out of the hospitality sector. Using historical return data on hospitality common stocks, this article shows that there is substantial market timing in the hospitality industry, with firms issuing equity capital near market highs and retiring capital near market lows. For hospitality investors, market timing translates into a shortfall of 1.5 percent per year over the time period 1962—2006. A value-weighted portfolio of both restaurant and hotel firms earns a lower average return over this time period compared to a similar portfolio of either hotel or restaurant stocks only, because of the same timing issue.

News Content, Investor Misreaction, and Stock Return Predictability

Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the occurrence of misreaction. Stocks that are larger, more liquid, more visible, and more covered, by analysts or by the media, are less likely to exhibit misreaction. On the other hand, the ambiguity and complexity of news content, and variables that proxy for investor distraction, are all associated with more misreaction and greater predictability.