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Ambiguity in Option Markets - Evidence from SEOs

Author

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  • Douglas Cumming
  • Lutz Johanning
  • Umut Ordo
  • Denis Schweizer

Abstract

Seasoned equity offerings (SEOs) typically provide investors with information, or signals, that are stock price relevant. This information, however, is generally intangible, meaning market participants have incomplete knowledge about its quality. Investors thus tend to regard it as ambiguous. To calculate a related ambiguity premium, we use straddle returns to explore the difference between option-implied and realised volatility following SEO events. After controlling for common risk factors, we find significantly positive alphas that can proxy for the ambiguity premium. In line with previous research, we find that the estimated ambiguity premium is positively correlated with firms' fundamental data intangibility, as proxied for by the skewness of stock returns.

Suggested Citation

  • Douglas Cumming & Lutz Johanning & Umut Ordo & Denis Schweizer, 2017. "Ambiguity in Option Markets - Evidence from SEOs," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 67-92, June.
    • Handle: RePEc:mul:jdp901:doi:10.12831/87060:y:2017:i:1:p:67-92
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    Cited by:

    1. Bernales, Alejandro & Cañón, Carlos & Verousis, Thanos, 2018. "Bid–ask spread and liquidity searching behaviour of informed investors in option markets," Finance Research Letters, Elsevier, vol. 25(C), pages 96-102.

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