Overcoming Arbitrage Limits: Option Trading and Momentum Returns

Ares, P Garcia; Filippou, Ilias; Abhyankar, Abhay; Haykır, Özkan

doi:10.2139/ssrn.3206873

Cited by 1 publication

(18 citation statements)

References 73 publications

(74 reference statements)

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“…First, we find evidence to support the findings of Blitz et al (2018) that IMS can generate more stable profits than TMS even after the emergence of traded options. Second, while Abhyankar et al (2018) show that option trading reduces momentum returns, we find that the impacts of option trading on idiosyncratic momentum returns are trivial. That is, option trading has more impact on TMS than on IMS.…”

Section: Introductionmentioning

confidence: 59%

“…Examining TMS, Abhyankar et al (2018) find that enhanced arbitrage capital flows and lower stock trading costs reduce momentum returns. The stock option market reduces short-selling constraints and improves stock price informativeness.…”

Section: Introductionmentioning

confidence: 99%

“…On the other hand, Abhyankar et al (2018) adopt TMS and show that high short interest indicates lower mispricing power and hence lower momentum returns. If investors can hedge short positions on stocks with traded options, the short interest in loser portfolios of stocks with options is expected to be higher than that in loser portfolios of stocks without options.…”

Section: Introductionmentioning

confidence: 99%

“…Dividing their sample data into two groups based on whether stocks have options or not during the period 1996-2016, Abhyankar et al (2018) find that stock option markets can provide more information about stocks by lowering short-sale barriers. If the stocks in loser portfolios have put options traded on them, option market makers would hedge their potential losses by selling the underlying stocks.…”

Section: H1 Idiosyncratic Momentum Profits Are Less Affected By the Introduction Of Traded Options Than Traditional Momentum Profitsmentioning

confidence: 99%

“…Therefore, investors bear less constraints on short-selling stocks. However, when Abhyankar et al (2018) demonstrate that the increased profits from past loser stocks with options lead to the attenuation of momentum profits, they use TMS.…”

Section: H1 Idiosyncratic Momentum Profits Are Less Affected By the Introduction Of Traded Options Than Traditional Momentum Profitsmentioning

confidence: 99%

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Does option trading affect idiosyncratic momentum?

Guo

Pyo

2020

Cogent Economics & Finance

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Portfolios in idiosyncratic momentum are formed on past residuals of the Fama-French three factor model rather than past total returns. This study examines whether the idiosyncratic momentum strategy can sustain excess returns following the emergence of traded options. We compare idiosyncratic momentum returns with traditional momentum returns over different holding periods and over difference in traded options. Our results show that idiosyncratic momentum returns for stocks with options are positive for three, six, and twelve months following the formation date, while traditional momentum returns for those with options are insignificant or even turn to negative. We also find strong evidence that the enhanced information efficiency led by short selling has impacts more on traditional momentum than on idiosyncratic momentum. While traditional momentum disappears on stocks with traded options, idiosyncratic momentum survives and is still anomalous to the efficient market hypothesis.

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Section: Introductionmentioning

confidence: 59%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: H1 Idiosyncratic Momentum Profits Are Less Affected By the Introduction Of Traded Options Than Traditional Momentum Profitsmentioning

confidence: 99%

Section: H1 Idiosyncratic Momentum Profits Are Less Affected By the Introduction Of Traded Options Than Traditional Momentum Profitsmentioning

confidence: 99%

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