Option Trading and Individual Investor Performance

Bauer, Rob; Cosemans, Mathijs; Eichholtz, Piet

doi:10.2139/ssrn.965810

Cited by 31 publications

(40 citation statements)

References 31 publications

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“…The average portfolio turnover is 4.7% per month (Table II, panel C), less than the 6% reported by Barber and Odean (2000) and much less than the 9% and 24% reported for option and equity traders, respectively, by Bauer et al (2009). This result likely occurs because the other samples are from Internet brokerage firms, whereas my sample includes investors who use full service or telephone‐based, execution‐only brokerage services.…”

Section: Analysis and Resultsmentioning

confidence: 84%

“…The regression of the monthly common equity return differences uses a three‐factor model developed by Fama and French (1993) to correct for different style tilts in the portfolios. I also regress monthly portfolio return differences using a six‐factor model that, beyond the three Fama‐French factors, features variations in portfolio characteristics (Bauer et al, 2009). I use the following model to calculate differences in alphas for the overall investor portfolio: and I estimate the alpha differences in the equity portfolios as follows: …”

Section: Analysis and Resultsmentioning

confidence: 99%

“…Korniotis and Kumar (2011) confirm that older, more experienced investors exhibit greater investment knowledge, but they seem to have poorer investment skills, perhaps due to cognitive aging. Portfolio turnover also may hurt net returns (Barber and Odean, 2000) such that the most active traders outperform in gross terms, but underperform in net terms (Bauer et al, 2009). Finally, with regard to wealth, portfolio size is a widely used proxy for investor sophistication.…”

Section: Datamentioning

confidence: 99%

“…Finally, with regard to wealth, portfolio size is a widely used proxy for investor sophistication. Anderson (2008) reports a positive association between portfolio value and trading performance, and Bauer et al (2009) indicate that large portfolios outperform small portfolios. However, Barber and Odean (2000) find no significant differentials between the largest and smallest portfolios.…”

Section: Datamentioning

confidence: 99%

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Financial Advice and Individual Investor Portfolio Performance

Kramer

2012

Financial Management

129

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This paper investigates whether financial advisers add value to individual investors’ portfolio decisions by comparing portfolios of advised and self‐directed (execution‐only) Dutch individual investors. The results indicate significant differences in characteristics and portfolios between these investor groups, but no evidence of differences in risk‐adjusted performance. The findings indicate that portfolios of advised investors are better diversified and carry significantly less idiosyncratic risk. In addition, evidence from an analysis of investors who switch to advice taking indicates that these findings (at least in part) reflect the effect of advisory intervention.

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Section: Analysis and Resultsmentioning

confidence: 84%

Section: Analysis and Resultsmentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

Section: Datamentioning

confidence: 99%

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Financial Advice and Individual Investor Portfolio Performance

Kramer

2012

Financial Management

129

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“…Consistent with the presence of unsophisticated investors in the options market, Bauer, Cosemans, and Eichholtz [] find that individual option investors incur substantial losses on their option investments. On the other hand, several papers conclude that options trading makes firms’ stock prices more efficient (e.g., Jennings and Starks [], Skinner [], Mendenhall and Fehrs [], Truong and Corrado []).…”

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confidence: 85%

Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

Milian

2015

J of Accounting Research

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Prior research has documented that arbitrage activity significantly reduces or eliminates stock market anomalies. However, if anomalies arise due to unsophisticated investors’ behavioral biases, then these same biases can also apply to unsophisticated arbitrageurs and thereby disrupt the arbitrage process. Consistent with a disruption in the arbitrage process for the post‐earnings announcement drift anomaly, I document that the historically positive autocorrelation in firms’ earnings announcement news has become significantly negative for firms with active exchange‐traded options. For these easy‐to‐arbitrage firms, the firms in the highest decile of prior earnings announcement abnormal return (prior earnings surprise), on average, underperform the firms in the lowest decile by 1.59% (1.43%) at their next earnings announcement. Additional analyses are consistent with investors learning about the post‐earnings announcement drift anomaly and overcompensating. This study suggests that unsophisticated attempts to profit from a well‐known anomaly can significantly reverse a previously documented stock return pattern.

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The Demand for Warrants and Issuer Pricing Strategies

Baule

Blonski

2014

Journal of Futures Markets

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We develop a model for the demand of warrants by individual investors with regard to their sensitivity to issuer margins, defined as the relative overpricing with respect to the theoretical value. Based on an empirical data set we show that investors are relatively margin-sensitive; that is, given similar warrants from different issuers or warrants with similar characteristics, investors tend to buy those with the lowest margin. Investors are, however, not absolutely margin-sensitive; that is, demand is not influenced by the overall margin level. Our model suggests an equilibrium with different issuer pricing strategies for different warrants in such a situation. Consistent with the model's predictions, we find that issuers vary their pricing with the moneyness of a warrant. We thus give an explanation for the dependence of issuer margins on a product's moneyness, which has been documented in the literature for several retail derivative products.

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Option Trading and Individual Investor Performance

Cited by 31 publications

References 31 publications

Financial Advice and Individual Investor Portfolio Performance

Financial Advice and Individual Investor Portfolio Performance

Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?

The Demand for Warrants and Issuer Pricing Strategies

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