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Review of Quantitative Finance and Accounting

, Volume 34, Issue 3, pp 371–381 | Cite as

Do option traders on value and growth stocks react differently to new information?

  • Wei He
  • Yen-Sheng Lee
  • Peihwang Wei
Original Research

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.

Keywords

Implied volatility Overreactions Value and growth stocks 

JEL Classification

G14 G13 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Department of Finance and Economics, College of BusinessMississippi State UniversityStarkvilleUSA
  2. 2.College of BusinessBellevue UniversityBellevueUSA
  3. 3.Department of Economics and Finance, College of Business AdministrationUniversity of New OrleansNew OrleansUSA

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