Finance and Financial Management Commons^™

Essay On Asset Pricing, Fei Gao

Dissertations and Theses Collection (Open Access)

We uncover a novel stock return predictor from the options market, the volume-weighted strike-spot price ratio (VWKS) across all traded option contracts. High (low) VWKS indicates that the mass of options volume on an underlying stock centers at the out-of-the-money region of call (put) options. Empirically, VWKS has positive and robust predictive ability for underlying returns after controlling for a long list of variables including known return predictors from the options market, stock illiquidity, and past stock returns, and has more persistent and stronger predictive power for stocks with higher information asymmetry and arbitrage costs. We also find that VWKS …