Abstract
This study compares the changes in implied volatilities of options on Nasdaq 100 and Russell 2000 value and growth portfolios, for the time period of 2004 and 2005. Following the methodologies in Stein (J Finance 44:1011–1024, 1989) and Heynen et al. (J Financ Quant Anal 29:31–56, 1994), we attempt to infer whether there are systematic differences in the degree of overreactions between value and growth options. The empirical evidence indicates that the reactions to information by investors in growth options, as proxied by options on Nasdaq 100 and Russell 2000 growth, are stronger than those of Russell 2000 value. Whether these reactions can be considered as overreacting, however, is not entirely conclusive. Nevertheless, the results imply that difference in investors’ behavior and styles is one potential explanation for the value stock effect.
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Notes
An experimental study by Caginalp et al. (2002) find evidence that the presence of speculative stocks may decrease the price of a value stock and increase its volatility.
While index composition does change over time, changes are infrequent events.
In a previous version of the paper, data in the 2000–2003 was also used. The results are qualitatively similar. Because that period is characterized by much lower trading and sometimes no trading, we do not report results for that period.
Following convention, near-the-money options are defined as those for which the stock price is within 10% of the exercise price.
In the earliest version of this study, we use options on individual stocks, but unfortunately the non-trading problem also exists for most individual stocks with the exception of a handful of liquid stocks. With this limited set of data, we obtain results that are qualitatively similar to what reported here.
Based on Akaike information criterion (AIC), the overall fit of the two models is about the same. This might seem surprising to some, since EGARCH is a more flexible model and Heynen et al. (1994) find that EGARCH fits better for implied volatility for the EOE index. We suspect that because EOE is likely a less liquid market relative to the portfolios here, the asymmetric feature of EGARCH model is more applicable there.
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He, W., Lee, YS. & Wei, P. Do option traders on value and growth stocks react differently to new information?. Rev Quant Finan Acc 34, 371–381 (2010). https://doi.org/10.1007/s11156-009-0134-y
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DOI: https://doi.org/10.1007/s11156-009-0134-y