Chapter One: Equity Option Returns over Trading and Non-Trading Periods

This paper finds that both call and put option returns on the S&P 500 index are, on average, larger for the open-to-close period than for the close-to-open period. This difference in returns decreases with time-to-maturity and moneyness. These patterns are inconsistent with expected option returns. In particular, delta-neutral straddles generate positive returns in the trading period and negative returns in the non-trading period. This is puzzling, because straddle holders (who benefit from volatility) are compensated during the more risky trading period, but straddle writers (who bear volatility risk) seem overly compensated during the less risky non-trading period. Using simulations, I show that the Black-Scholes...[ Read more ]

Chapter One: Equity Option Returns over Trading and Non-Trading Periods

This paper finds that both call and put option returns on the S&P 500 index are, on average, larger for the open-to-close period than for the close-to-open period. This difference in returns decreases with time-to-maturity and moneyness. These patterns are inconsistent with expected option returns. In particular, delta-neutral straddles generate positive returns in the trading period and negative returns in the non-trading period. This is puzzling, because straddle holders (who benefit from volatility) are compensated during the more risky trading period, but straddle writers (who bear volatility risk) seem overly compensated during the less risky non-trading period. Using simulations, I show that the Black-Scholes-Merton (BSM) model can undervalue (overvalue) option time decay during the trading (non-trading) period if the underlying asset’s volatility alternates between high levels during trading hours and low levels during non-trading hours. Moreover, I extend the BSM model to include an alternating volatility process, and use this modified model to show that S&P 500 option prices do not fully account for alternating volatility.

Chapter Two: The Costs and Benefits of Corporate Global Diversification

In 1998, Compustat revamped the Segments database to include all geographic segments as reported by U.S. firms. By analyzing this detailed sample from 1998 to 2009, I find that firms with more foreign segments have lower firm value. However, firms that have lower correlation among its portfolio of countries tend to have higher firm value. Correlation between countries is estimated by using stock index returns. In addition, I find that firm value increases with greater sales exposure to developing countries. The results of this study are robust to controlling for self-selection bias. These findings show that different aspects of global diversification have different effects on firm value.