Do option traders on value and growth stocks react
differently to new information?
Wei He Æ Yen-Sheng Lee Æ Peihwang Wei
Published online: 20 June 2009
Ó Springer Science+Business Media, LLC 2009
Abstract This study compares the changes in implied volatilities of options on Nasdaq
100 and Russell 2000 value and growth portfolios, for the time period of 2004 and 2005.
Following the methodologies in Stein (J Finance 44:1011–1024, 1989) and Heynen et al.
(J Financ Quant Anal 29:31–56, 1994), we attempt to infer whether there are systematic
differences in the degree of overreactions between value and growth options. The empirical
evidence indicates that the reactions to information by investors in growth options, as
proxied by options on Nasdaq 100 and Russell 2000 growth, are stronger than those of
Russell 2000 value. Whether these reactions can be considered as overreacting, however, is
not entirely conclusive. Nevertheless, the results imply that difference in investors’
behavior and styles is one potential explanation for the value stock effect.
Keywords Implied volatility Á Overreactions Á Value and growth stocks
JEL Classiﬁcation G14 Á G13
Many empirical studies indicate that value stocks outperform growth stocks in the long
term, measured either by total return or risk-adjusted return (e.g., Fama and French (1992,
W. He (&)
Department of Finance and Economics, College of Business, Mississippi State University,
Starkville, MS 39762, USA
e-mail: HHe@cobilan.msstate.edu; firstname.lastname@example.org
College of Business, Bellevue University, Bellevue, NE 68005, USA
Department of Economics and Finance, College of Business Administration,
University of New Orleans, New Orleans, LA 70148, USA
Rev Quant Finan Acc (2010) 34:371–381