Research & Projects

Working Paper

Hannes Mohrschladt, Judith C. Schneider: Option-Implied Skewness: Insights from ITM-Options, R&R Journal of Economic Dynamics and Control, 2020.
While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical implications of using in-the-money (ITM) options. First, we show that discarding ITM-options based on liquidity arguments appears unjustifiable for individual stock options. Second, the information content of ITM-options provides new economic insights. In particular, we find that the positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. While this reversal is inconsistent with an explanation based on skewness preferences, MFIS apparently reflects information that is not timely incorporated in stock prices due to market frictions. Based on these insights, we introduce ∆MFIS as a new measure of additional option-embedded information that significantly predicts subsequent returns beyond a
large range of other option-based return predictors.

Devdeepta Bose, Colin Camerer, Henning Cordes, Sven Nolte, Judith C. Schneider: Decision weights for experimental asset prices based on visual salience, R&R Review of Financial Studies, 2021. SSRN

Using a machine-learning algorithm that can predict visually salient portions of images, we construct decision weights based on salient parts of a stock price chart. We analyze these weights in three experimental studies that vary in the realism of the price path images and task complexity. We find that these decision weights are predictive of future invest- ments. We conclude that visual salience captures attention paid to historical returns. Visual salience goes beyond overweighting returns at the tails of the historical distribution or with respect to their difference to a reference return as in the models of Barberis et al. (2016) and Bordalo et al. (2013). Moreover, we find that visual salience affects investment decisions independently from recency effects.