This paper develops a new approach to explain why risk factors constructed from option returns are priced in the stock market. We decompose an option- based factor into three main components and identify the one responsible for the beta-return relationship. Applying this method to the bear risk...

This paper finds that low-price stocks' earnings announcement returns are significantly lower than those of high-price stocks. In contrast, we do not find such underperformance outside announcement periods. This evidence suggests that the cognitive bias induced by low share prices are corrected...

This paper shows that option trading does not reduce overpricing in the underlying stock market. A popular view in the literature is that options lower short selling cost, therefore, they allow stock prices to better incorporate negative information and opinions. Testing such a hypothesis is...

This paper shows that hedging by index option writers generates significant price pressure on the market as a whole, resulting in market return reversals. Furthermore, this aggregate hedging pressure affects some stocks more than others, causing cross-sectional dispersion of pricing errors and...

We show that the average difference between the implied volatilities of call and put options on individual equities, which we term the implied volatility spread (IVS), has strong predictive power for stock market returns at horizons between one and six months, with monthly in-sample and...