Keywords: Bear spread, Left-tail risk, Behavioral bias, Equity options, Underreaction
JEL Classification: G12, G13, G14
학회소식
[2022년 5차 CAFM2022]Does the options market underreact to firms’ left-tail risk?
작성자 : 관리자
조회수 : 312
게시일 :
2022-12-20
We find that firms’ left-tail risk is a strong positive predictor of future returns of bear spreads, an option trading strategy that provides downside protection on the underlying. Bear spreads of high (low) left-tail risk firms earn positive (negative) returns, suggesting that the downside protection they provide is not adequately priced and the options market underreacts to firms’ left-tail risk. This underreaction is stronger when the underlying stocks experience larger recent losses and are closer to their 52-week lows, and when information uncertainty and investor sentiment are high. Our finding is consistent with a behavioral rather than a risk-based explanation.
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