title   
  

Deviations from put-call parity and earnings announcement returns

Atılgan, Yiğit (2010) Deviations from put-call parity and earnings announcement returns. (Preprint)

[img]
Preview
PDF (This is a RoMEO green publisher -- author can archive pre-print (ie pre-refereeing)) - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
175Kb

Abstract

Prior research documents that deviations from put-call parity can predict stock returns. If the trading activity of informed investors is an important driver of deviations from put-call parity, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by deviations from put-call parity is stronger during earnings announcement periods. These deviations are measured by the implied volatility spreads between pairs of matched put and call options. During a two-day earnings announcement window, the abnormal returns to a portfolio that buys stocks with relatively expensive call options is about 2 percent greater than the abnormal returns to a portfolio that buys stocks with relatively expensive put options. This result is robust after (i) measuring deviations from put-call parity in alternative ways, (ii) using value-weighted portfolio returns, and (iii) controlling for contemporaneous and lagged risk factors and lagged stock returns. The degree of announcement return predictability is stronger when (i) deviations from put-call parity are measured using more liquid options, (ii) information environment is more asymmetric, and (iii) stock liquidity is low.

Item Type:Article
Uncontrolled Keywords:put-call parity, earnings announcements, information ‡ow
Subjects:H Social Sciences > HG Finance
ID Code:16231
Deposited By:Yiğit Atılgan
Deposited On:22 Dec 2010 22:01
Last Modified:22 Dec 2010 22:01

Repository Staff Only: item control page