A Study of Call Price Behavior under a Stationary Return Generating Process.

Conventional event study methodologies that require a stationary return generating process are generally not applicable to option studies because options are known to have constantly changing risk-reward characteristics over time. Nevertheless, this paper attempts to analyze call price behavior in response to earnings and dividend surprises using the mean-adjusted return method and the cumulative sum method; both methods assume stationarity. With proper risk-neutralizing modification, along with careful specification of the test design, the authors are able to overcome the difficulty of such time-dependent methodologies. The empirical results show the robustness of the method across calls of different maturities and exercise prices. Copyright 1989 by MIT Press.