Stock Return Autocorrelations and Expected Option Returns

We show that the return autocorrelation of underlying stock is an important determinant of expected equity option returns. Using an extended Black-Scholes model incorporating the presence of stock return autocorrelation, we demonstrate that expected returns of both call and put options are increasing in the return autocorrelation coefficient of the underlying stock. Consistent with this insight, we find strong empirical support in the cross-section of average returns of equity options. Our paper highlights the necessity to control for stock return autocorrelation when studying option return predictability. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03071 .

• 저널Management Science · 71(6) · 4895–4914
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2023.03071
• 저자Yoontae Jeon, Raymond Kan, Gang Li