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Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

Listed author(s):
  • Allen M. Poteshman

    (Department of Finance, College of Commerce and Business Administration, University of Illinois,)

  • Vitaly Serbin

    (Department of Finance, College of Commerce and Business Administration, University of Illinois and ITG Inc. in Boston, MA.)

Registered author(s):

    This paper analyzes the early exercise of exchange-traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of full-service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Rational and irrational exercise is triggered for discount and full-service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock. Copyright 2003 by the American Finance Association.

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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 58 (2003)
    Issue (Month): 1 (02)
    Pages: 37-70

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    Handle: RePEc:bla:jfinan:v:58:y:2003:i:1:p:37-70
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