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theses

My dissertation comprises of three essays: 1) Large price changes and subsequent returns; 2) Using option implied volatilities to predict absolute stock returns: Evidence from earnings announcements and annual shareholders’ meetings; and 3) How do short-sale constraints affect options trading? Evidence from Regulation SHO. The first essay investigates whether large stock price changes are associated with short-term reversals or momentum, conditional on analyst price target or earnings forecast revisions immediately following these price changes. We find momentum when analysts issue revisions after large price shocks, suggesting that the initial price changes were based on new information. In contrast, when price changes are not followed by immediate analyst revisions, we document short-term reversals, indicating that the initial price shocks were caused by liquidity or noise traders. A trading strategy based on the direction of the price change and analyst revisions earns significant abnormal monthly returns (over 1 percent). The second essay provides evidence that an option implied volatility-based measure predicts future absolute excess returns of the underlying stock around earnings announcements and annual meetings of shareholders. Our results imply that option traders anticipate the change in uncertainty and trade on the expected volatility around these scheduled events. We also show that net straddle returns (after transaction costs) are significantly and negatively related to the predicted volatility of returns around the events, suggesting that the option writers expect to be compensated for the predicted volatility. The third essay investigates the effect of stock short-sale constraints on options trading by exploiting two SEC rules under Regulation SHO: Rule 203(locate and close-out requirement) and Rule 202T (temporary removal of short-sale price tests for pilot stocks). We find a significant decrease in short interests of stocks after Rule 203, and a significant increase in short-sale volume of pilot stocks after Rule 202T, supporting the validity of Rule 203/Rule 202T as exogenous increase/decrease in short-sale constraints. After Rule 203, options volume increases significantly, especially among firms with low institutional ownership and low option bid-ask spread. However, we find no significant changes in the option trading volume of pilot stocks (relative to control stocks) after Rule 202T.

ETD_6461

Ph.D.

Includes bibliographical references

Includes vita

by Chen Zhao

doi:10.7282/T3M32XMQ

ETD doctoral

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