University of Illinois Urbana-Champaign

Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

Poteshman, Allen M.; Serbin, Vitaly

Content Files
ofor01-02.pdf

Permalink

https://hdl.handle.net/2142/3794

Description

Title
Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options
Author(s)
  • Poteshman, Allen M.
  • Serbin, Vitaly
Issue Date
2001-08
Keyword(s)
  • Prospect theory
  • Options market
Date of Ingest
2008-03-14T20:52:29Z
Abstract
This paper analyzes the early exercise of Chicago Board Options Exchange listed calls by different classes of investors over the 1996-1999 period. We present two main findings. First, there are a large number of early exercises that can be identified as clearly irrational without invoking any model of market equilibrium, and these exercises are not uniformly distributed across the investor classes. Customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Second, irrational exercise is triggered both by the underlying stock price attaining its highest level over the past year and by the underlying stock having high past returns. Our findings provide evidence that prospect theory is operative in the options market and that it applies differentially across various classes of investors.
Publisher
Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report Name or Number
OFOR Working Paper Series, no. 01-02
Type of Resource
text
Genre of Resource
Working / Discussion Paper
Language
eng
Permalink
http://hdl.handle.net/2142/3794

Owning Collections

OFOR Working Paper Series PRIMARY