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https://hdl.handle.net/2142/87438
Description
Title
Stock Option Returns, a Puzzle
Author(s)
Ni, Xiaoyan
Issue Date
2007
Doctoral Committee Chair(s)
Poteshman, Allen M.
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
Under very weak assumptions, the expected returns of European call options must be positive and increasing in the strike price. This paper investigates the returns to call options on individual stocks that do not have an ex-dividend day prior to expiration. The main findings are that over the 1996 to 2005 period (1) out-of-the-money calls have negative average returns, and (2) the average returns of high strike calls are lower than those of low strike calls. The puzzling returns are robust to a number of variations in methodology, and are not due to a 'peso' problem. Finally, preliminary evidence is presented that is consistent with investor risk-seeking contributing to the puzzling call returns.
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