Information Content of Option Prices: Comparing Analyst Forecasts to Option-Based Forecasts

Finance theory dictates that public information is incorporated in asset pricing expectations. Empirical research suggests that not all return forecasts are equal. Do different forecasts weigh information differently? This paper decomposes the information content of option and analyst forecasts. The results show that analyst forecasts are constructed using a wide-spectrum of market and firm-level data while option-based forecasts capture measures of uncertainty. Further, we revisit the question of whether analyst forecast dispersion is a proxy for uncertainty. We find a negative relationship between analyst disagreement and option-based forecasts, indicating that option traders view analyst disagreement as a source of uncertainty.