October 2003

Research and Presentation by Finance Faculty Member Wins Honor

A working paper by Allen Poteshman and MIT collaborator Jun Pan won the first place award at the Chicago Quantitative Alliance meeting held in September. Poteshman presented "The Information in Option Volume for Stock Prices" as part of the academic competition at the meeting, which featured a presentation by Nobel Prize winner Vernon Smith of George Mason University. The other finalists for the academic competition honor were from Harvard Business School and the University of Maryland.

In their research, Poteshman and Pan found strong evidence that option trading volume contains information about future stock price movements. The pair used a dataset from the Chicago Board Options Exchange for 1999-2001 in their analysis. The data showed that "buying stocks with low put/call ratios and selling stocks with high put/call ratios generates an expected return of 40 basis points per day and 1 percent per week." This outcome was not affected by the exclusion of earnings announcement windows and was also stronger for smaller stocks. The pair believe that their data also reveal the likely type of investors behind informed option trading. The complete working paper is available online.

Poteshman is an assistant professor in the Department of Finance where he is currently teaching graduate courses on investments and financial derivatives. He holds a PhD in Finance from the University of Chicago. He joined the Illinois faculty in 1999.