Informed traders often use options that are not in-the-money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume-weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross-sectionally and at the portfolio level yielding a Fama-French five-factor alpha of 12% per year for all stocks and 33% per year for high implied volatility stocks.
Behavioral theories contend that the human decision-making process tends to both incorporate anchor points and improperly weight low probability events. In this study, we find evidence that equity option market investors anchor to prices and incorporate a probability weighting function similar to that proposed by cumulative prospect theory. The biases result in inefficient prices for put options when firms have relatively high or relatively low implied volatilities. This has implications for the cost of hedging long portfolios and long individual equity positions.
CD8 T cells are a critical part of the immune response to tumors, with CD8 T cell infiltration predicting disease progression in many types of cancer. Recent work in CD8 T cell immunology described how CD8 T cells respond to chronic diseases, finding two subsets of CD8 T cells within tumors. One is a stem-like CD8 T cell and the other is a terminally differentiated CD8 T cell with cytotoxic capabilities. Determining how tumor-specific CD8 T cells activate and differentiate is critical to understanding why some tumors are highly infiltrated. To study how tumor-specific CD8 T cells are activated, I have made a prostate cancer model that expresses the viral LCMV glycoprotein (GP) which acts as a tumor-specific antigen. We have used this model to study tumor-specific CD8 T cell activation by adoptively transferring LCMV GP specific TCR transgenic P14 CD8 T cells into TRAMPC1-LCMV-GP bearing mice. We have found when tumor-specific CD8 T cells are activated in the tumor-draining lymph node they acquire an undifferentiated but activated program, upregulating CD44, PD1 but retaining high TCF1 and CD62L expression. These undifferentiated activated CD8 T cells do not acquire a typical effector program that is seen in an acute viral infection such as LCMV Armstrong, yet they are able to migrate to the tumor to establish the anti-tumor response. In conclusion, tumor-specific CD8 T cells do not acquire an effector program after activation and instead gain an undifferentiated activated phenotype. These data suggest that tumor-specific CD8 T cells are activated in the TDLN and differentiate to become the stem-like CD8 T cells within the tumor, establishing the anti-tumor CD8 response.
Monte Carlo techniques are ubiquitous in financial planning and related fields. However, the assumptions underlying Monte Carlo techniques can be unrealistic in many modeling contexts. One criticism of Monte Carlo techniques is the distributional assumption underlying the technique, which usually translates into assuming normally distributed data. Bayesian statistical techniques are an alternative estimation strategy which allows one to estimate the underlying distribution as well as make model comparisons between potential candidate distributions. In addition, Bayesian techniques allow for an intuitive interpretation of results, which makes Bayesian techniques more useful than standard Monte Carlo simulation. We illustrate these ideas using returns from the S&P 500 index over a period of 50 years. The assumption of normality for these data leads to economically significant incorrect inferences and interpretation.
We reexamine the findings of Gompers, Ishii, and Metrick (2003) and Bebchuk, Cohen, and Ferrell (2009) and find the link between corporate governance (measured by G index and E index) and firm stock returns is weaker than previously suggested. We extend the sample period and find a reversal of the relationship documented in these works over the 1990s and early 2000s. We show the observed superior performance of good governance firms during the 1990s is partially driven by large firms and the Nasdaq bubble. We conclude corporate governance is less important for firm stock returns than suggested by previous literature.
Past works have documented the predictive power of short-term stock return momentum and option volume ratios for future stock returns. In this article, the authors find option volume ratios have greater power to predict future returns when evidence exists that prices are out of equilibrium, proxied for by increases in implied volatility. In the studied sample, short-term momentum has significant power to predict future stock returns only in the presence of evidence prices are out of equilibrium. The authors document that option volume ratios, changes in option implied volatility, and short-term momentum together have significant predictive power for the cross-section of stock returns in subsequent periods. The difference between firms predicted to be strong performers and those predicted to be weak performers is more than 1% a month. Buy-and-hold returns for an equally weighted portfolio of predicted strong performers are 249% over the 1996–2009 period compared with a loss of 38% for predicted weak performers. S&P 500 Index returns over the same period were 60%. TOPICS:Analysis of individual factors/risk premia, options, security analysis and valuation
The prices of ETNs often significantly exceed their indicative values. Because ETNs share many features in common with zero-coupon bonds, this empirical finding is unexpected. Adopting the language of their prior research, the authors refer to this as the negative WDFD puzzle. Using a sample of 94 ETNs over the period June 6,2006, to December 31,2009, they explore three possible explanations for the negative WDFD puzzle. They find that the puzzle is not a result of liquidity constraints. In fact, increased trading volume is mildly correlated with more extreme mispricing in ETNs. The authors also find that ETN prices significantly exceeding their corresponding indicative values do not possess information about the future prospects of the asset, commodity, or index tied to the ETN. Instead, they conclude that the negative WDFD puzzle is the result of 1) uninformed, returnchasing investors and 2) a largely inefficient current system for creating new shares of existing ETNs. To work toward eliminating the negative WDFD puzzle, the authors recommend that ETN issuers who have not already done so restructure their systems for creating new ETN shares by allowing profit-motivated investors to initiate the process of share creation as they identify extreme mispricing in the marketplace. The authors also advise extreme caution to investors trading ETNs that suffer from share-creation inefficiencies because price inefficiencies are likely prevalent in such ETNs. TOPICS:Exchange-traded funds and applications, derivatives
We investigate whether a simple long-short weekly trading strategy based on mispricing among ETNs generates profits in excess of the S&P 500 over the sample period of June 6, 2006 to January 30, 2012. Ignoring transaction costs, liquidity, and short selling constraints we find the following. (1) mispricing is prevalent among ETN securities. We enter into 90 trades over our 295 week period using a mispricing threshold of 5% and requiring a minimum average daily volume of 20,000 shares. (2) Total returns to our strategy are significantly higher than the S&P 500, which had a total return of 3.70% over the same period. Our strategy generated total returns ranging from 9% to 110% over a mispricing threshold range of 8 to 14% depending on our minimum daily trading volume requirements. (3) Nearly all the trades and all the profits from our strategy come from the short side of our portfolio. This is consistent with previous empirical work demonstrating that ETNs are more likely to be overpriced than underpriced.
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