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Option Market Efficiency and Analyst Recommendations

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  • James S. Doran
  • Andy Fodor
  • Kevin Krieger

Abstract

This paper examines the information content in option markets surrounding analyst recommendation changes. The sample includes 6,119 recommendation changes for optionable stocks over the period January 1996 through December 2005. As expected, mean underlying asset returns are positive (negative) on days of recommendation upgrades (downgrades). However, volatility levels and shifts prior to recommendation changes explain a significant portion of underlying asset price responses. Ex‐ante price and volatility responses in option markets are linked to increased jump uncertainty risk premia. Our findings suggest information in option markets leads analyst recommendation changes, implying revisions contain less information than previously thought.

Suggested Citation

  • James S. Doran & Andy Fodor & Kevin Krieger, 2010. "Option Market Efficiency and Analyst Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 560-590, June.
    • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:5-6:p:560-590
    DOI: 10.1111/j.1468-5957.2010.02189.x
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    References listed on IDEAS

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    Cited by:

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    2. Yossi Shvimer & Avi Herbon, 2020. "Tradability, closeness to market prices, and expected profit: their measurement for a binomial model of options pricing in a heterogeneous market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(3), pages 737-762, July.
    3. Andrew Van Buskirk, 2012. "Discussion of Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 433-442, May.
    4. Suresh Govindaraj & Yubin Li & Chen Zhao, 2020. "The effect of option transaction costs on informed trading in the options market around earnings announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 615-644, May.

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