Anomalies, Option Volume, and Disagreement

Document Type

Article

Publication Date

Fall 2024

Publisher

Wiley

Source Publication

Financial Management

Source ISSN

0046-3892

Original Item ID

DOI: 10.1111/fima.12466

Abstract

We document robust amplification of stock market anomaly returns associated with elevated option trading volume driven by disagreement trades. Consistent with the correction of mispricing associated with biased beliefs, anomaly returns are higher when disagreement option volume is high prior to earnings announcements. Additionally, we demonstrate that disagreement-based option volume is negatively related to future stock returns among stocks that are overpriced based on anomaly characteristics. Our findings also concentrate in stocks that are also difficult to short, emphasizing the combined impact of investor bias and shorting costs. Leveraging the staggered adoption of extensible Business Reporting Language, we establish a plausibly identified link between investor disagreement and short-horizon mispricing in stocks.

Comments

Financial Management, Vol. 53, No. 3 (Fall 2024): 579-603. DOI.

Link to Full Text

Share

COinS