← Search

Too Good to Be True: Look-Ahead Bias in Empirical Options Research

Jefferson Duarte¹; Christopher S. Jones²; MEHDI KHORRAM³; Haitao Mo⁴; Junbo L. Wang⁵

¹ Jesse H. Jones School of Business, Rice University , · ² Marshall School of Business, University of Southern California , · ³ Ivy College of Business, Iowa State University , · ⁴ School of Business, University of Kansas , · ⁵ Ourso College of Business, Louisiana State University ,

Abstract Numerous trading strategies examined in options research exhibit remarkably high mean returns and Sharpe ratios. We show some of these seemingly “good deals” are due to look-ahead biases. These biases stem from using information unavailable at the portfolio formation time to filter out observations suspected of being noisy or erroneous. Our results suggest that elevated Sharpe ratios may serve as potential indicators of such look-ahead biases. Furthermore, deviating from previous literature findings, we show that illiquidity is not strongly priced in stock options and that only a small set of stock characteristics are in fact associated with option expected returns. (JEL G12, G14, G17)

DOI

10.1093/rfs/hhag061

Language

en

Export

BibTeX

Sources

openalex crossref