Fundamental analysis and option returns

Theodore Goodman, Monica I Neamtiu, X. Frank Zhang

Research output: Contribution to journalArticle

Abstract

This article investigates whether fundamental volatility information is appropriately priced in the options market. We find that fundamental signals exhibit incremental predictive power with respect to future option returns above and beyond what is captured by implied and historical stock volatility, suggesting that the options market does not fully incorporate fundamental information into option prices. Transaction costs substantially reduce the overall profitability of hedge strategies that exploit only the fundamental volatility information in these accounting signals; however, fundamental signals provide a useful complement for strategies based on historical volatility.

Original languageEnglish (US)
Pages (from-to)72-97
Number of pages26
JournalJournal of Accounting, Auditing and Finance
Volume33
Issue number1
DOIs
Publication statusPublished - Jan 1 2018
Externally publishedYes

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Keywords

  • Accounting signals
  • Fundamental analysis
  • Fundamental volatility
  • Return

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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