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The Value Line Enigma Extended: An Examination of the Performance of Option Recommendations

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  • Broughton, John B
  • Chance, Don M

Abstract

The authors extend the research on the Value Line enigma by examining the performance of call recommendations in Value Line Options. D. Galai's hedge decomposition procedure identifies the components of the calls' returns. Abnormal call returns were most pronounced immediately following the purchase, which is consistent with studies of Value Line's stock rankings. The largest and most significant abnormal performance was by calls assigned the highest rank written on stocks judged by Value Line to be correctly priced. Abnormal call return performance by joint call and stock ranks was consistent with hypothesis that Value Line identifies underpriced call options. Copyright 1993 by University of Chicago Press.

Suggested Citation

  • Broughton, John B & Chance, Don M, 1993. "The Value Line Enigma Extended: An Examination of the Performance of Option Recommendations," The Journal of Business, University of Chicago Press, vol. 66(4), pages 541-568, October.
  • Handle: RePEc:ucp:jnlbus:v:66:y:1993:i:4:p:541-68
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    References listed on IDEAS

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    5. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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    7. Mark Rubinstein., 1989. "Market Basket Alternatives," Research Program in Finance Working Papers RPF-187, University of California at Berkeley.
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    Cited by:

    1. Prombutr, Wikrom & Lockwood, Jimmy & Zhang, Ying & Le, Steven V., 2016. "Investor response to online value line rank changes: Foreign versus local stocks," Global Finance Journal, Elsevier, vol. 30(C), pages 10-26.
    2. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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