Affiliation:
1. Department of Finance, NUS Business School National University of Singapore Singapore Singapore
2. Department of Finance, College of Business Administration Marquette University Milwaukee Wisconsin USA
Abstract
AbstractWe document robust amplification of stock market anomaly returns associated with elevated option trading volume driven by disagreement trades. Consistent with the correction of mispricing associated with biased beliefs, anomaly returns are higher when disagreement option volume is high prior to earnings announcements. Additionally, we demonstrate that disagreement‐based option volume is negatively related to future stock returns among stocks that are overpriced based on anomaly characteristics. Our findings also concentrate in stocks that are also difficult to short, emphasizing the combined impact of investor bias and shorting costs. Leveraging the staggered adoption of eXtensible Business Reporting Language, we establish a plausibly identified link between investor disagreement and short‐horizon mispricing in stocks.