Peter P. Lung

Stock Market Mispricing: Money Illusion or Resale Option?

We examine two hypotheses to explain stock mispricing: i) the money illusion hypothesis (Modigliani and Cohn (1979)) and ii) the resale option hypothesis (Scheinkman and Xiong (2003)). We find that the money illusion hypothesis may explain the level, but not the volatility, of mispricing in the U.S. market. In contrast, the stock resale option hypothesis, which stems from heterogeneous beliefs about future dividend growth rates and short-sale constraints, can explain both the level and the volatility of mispricing. The evidence suggests that while the two hypotheses complement each other in explaining the level of mispricing, the resale option hypothesis provides a more coherent explanation for asset price bubbles, in which extraordinarily high price levels are often accompanied by excessive volatility and frenzied trading.

Trading in the Options Market around Financial Analysts' Consensus Revisions

This article investigates the options market around a revision in the financial analysts’ consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately three days prior to the announcement. We find this behavior in options-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts’ revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.

Moneyness and the response of the implied volatilities to price changes: The empirical evidence from HSI options

Abstract We examine the intertemporal and asymmetric response from implied volatility changes to price changes under different levels of option moneyness and evaluate the cause–effect relation between implied volatilities and price changes. Based on Hang Seng Index (HSI) options transaction data, we find that asymmetric responses are essentially driven by near-term out-of-the-money call options. In addition, options trading activity affects the response from volatility changes to equity price changes and information is more likely to travel from equity to option markets. We also pool call and put options together to reexamine the relation and find that options with higher exercise price show more significant results in the analysis of asymmetric responses.

Business Cycles and Net Buying Pressure in the S&P 500 Futures Options

We analyse the cyclical behaviour and intraday pattern of net buying pressure in the S&P 500 futures options market. The results suggest that the net buying pressure of puts is counter-cyclical and is more intense during contraction periods. The trading profits for selling put options during contraction periods thus far exceed those during expansion periods. Net buying pressure also exhibits an intraday pattern. Trading profits in the early trading sessions are higher than those for the rest of the day. In addition, we show that hourly-basis hedging yields smaller profits than daily-basis hedging, which suggests that the trading profits based on daily-basis hedging may contain a risk premium associated with discretely rebalanced ‘risk-free’ option portfolios.

Research Ranking of Finance Departments: A Modified Citation Approach

We provide a research ranking of academic finance departments that incorporates both a quantitative and qualitative dimension in its methodology. Based on the strengths of the various approaches in the literature, our modified citation approach includes all research outlets (not just finance journals and not just journal articles) as long as the research work has research impact, which is measured by having at least a moderate number of citations within a set of premier finance journals. The top-5 finance departments are the University of Chicago, the University of Rochester, MIT, Harvard University, and the University of Pennsylvania.

Is Limited Attention Universal? Evidence from Surprising Earnings News among Economically Linked Firms

The authors examine investors’ limited attention to surprising earnings news among economically linked firms. They do not find evidence of investors’ attention constraints on supplier firms after the announcement of customer firms’ surprising earnings news. Abnormal returns of supplier firms at the announcement of customer firms’ negative (positive) standardized unexpected earnings (SUE) are negative (positive) and significant, and cumulative abnormal returns (CAR) from day 1 to day 10 become insignificant. They also document that information uncertainty delays the diffusion of information between economically linked firms. Thus, the notion of limited attention is not a universal phenomenon, but it is subject to the nature of both the news and the parties involved.