Does option trading affect idiosyncratic momentum?
Portfolios in idiosyncratic momentum are formed on past residuals of the Fama-French three factor model rather than past total returns. This study examines whether the idiosyncratic momentum strategy can sustain excess returns following the emergence of traded options. We compare idiosyncratic momen...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Taylor & Francis Group
2020-01-01
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| Series: | Cogent Economics & Finance |
| Subjects: | |
| Online Access: | http://dx.doi.org/10.1080/23322039.2020.1824362 |
| _version_ | 1818673200425336832 |
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| author | Songchan Guo Unyong Pyo |
| author_facet | Songchan Guo Unyong Pyo |
| author_sort | Songchan Guo |
| collection | DOAJ |
| description | Portfolios in idiosyncratic momentum are formed on past residuals of the Fama-French three factor model rather than past total returns. This study examines whether the idiosyncratic momentum strategy can sustain excess returns following the emergence of traded options. We compare idiosyncratic momentum returns with traditional momentum returns over different holding periods and over difference in traded options. Our results show that idiosyncratic momentum returns for stocks with options are positive for three, six, and twelve months following the formation date, while traditional momentum returns for those with options are insignificant or even turn to negative. We also find strong evidence that the enhanced information efficiency led by short selling has impacts more on traditional momentum than on idiosyncratic momentum. While traditional momentum disappears on stocks with traded options, idiosyncratic momentum survives and is still anomalous to the efficient market hypothesis. |
| first_indexed | 2024-12-17T07:52:01Z |
| format | Article |
| id | doaj.art-c38fa6aa6d8a44fa9a6d9b852cb684be |
| institution | Directory Open Access Journal |
| issn | 2332-2039 |
| language | English |
| last_indexed | 2024-12-17T07:52:01Z |
| publishDate | 2020-01-01 |
| publisher | Taylor & Francis Group |
| record_format | Article |
| series | Cogent Economics & Finance |
| spelling | doaj.art-c38fa6aa6d8a44fa9a6d9b852cb684be2022-12-21T21:57:49ZengTaylor & Francis GroupCogent Economics & Finance2332-20392020-01-018110.1080/23322039.2020.18243621824362Does option trading affect idiosyncratic momentum?Songchan Guo0Unyong Pyo1Goodman School of Business, Brock UniversityGoodman School of Business, Brock UniversityPortfolios in idiosyncratic momentum are formed on past residuals of the Fama-French three factor model rather than past total returns. This study examines whether the idiosyncratic momentum strategy can sustain excess returns following the emergence of traded options. We compare idiosyncratic momentum returns with traditional momentum returns over different holding periods and over difference in traded options. Our results show that idiosyncratic momentum returns for stocks with options are positive for three, six, and twelve months following the formation date, while traditional momentum returns for those with options are insignificant or even turn to negative. We also find strong evidence that the enhanced information efficiency led by short selling has impacts more on traditional momentum than on idiosyncratic momentum. While traditional momentum disappears on stocks with traded options, idiosyncratic momentum survives and is still anomalous to the efficient market hypothesis.http://dx.doi.org/10.1080/23322039.2020.1824362g40g14 |
| spellingShingle | Songchan Guo Unyong Pyo Does option trading affect idiosyncratic momentum? Cogent Economics & Finance g40 g14 |
| title | Does option trading affect idiosyncratic momentum? |
| title_full | Does option trading affect idiosyncratic momentum? |
| title_fullStr | Does option trading affect idiosyncratic momentum? |
| title_full_unstemmed | Does option trading affect idiosyncratic momentum? |
| title_short | Does option trading affect idiosyncratic momentum? |
| title_sort | does option trading affect idiosyncratic momentum |
| topic | g40 g14 |
| url | http://dx.doi.org/10.1080/23322039.2020.1824362 |
| work_keys_str_mv | AT songchanguo doesoptiontradingaffectidiosyncraticmomentum AT unyongpyo doesoptiontradingaffectidiosyncraticmomentum |