Option Return Predictability

[SEEM5202 Seminar Announcement] (Friday, September 4, 2015, 5:00pm – 6:00pm)


                Department of Systems Engineering and Engineering Management
                             The Chinese University of Hong Kong


Date: Friday, 5:00pm – 6:00pm, 4 September, 2015

Title: Option Return Predictability

Speaker: Jie (Jay) Cao, Assistant professor in the Department of Finance, The Chinese University of Hong Kong.


We examine whether the cross-section of equity option returns can be predicted with a collection of well-known stock return predictors. The answer is yes for the majority of these variables, including idiosyncratic volatility, size, past stock returns, profitability, cash holding, dispersion of analyst forecast and earning surprise. Such predictabilities are not mechanically inherited from the stock market because stock return predictability is weak to non-existent for the underlying stocks in our sample and our results hold for delta-hedged option returns.  We document new option trading strategies that are profitable even after transaction costs. These profits are robust across different market conditions and subsamples. They cannot be explained by standard stock market risk factors, volatility risk or tail risk. Our results have important implications for option valuation and option market efficiency.


Jie (Jay) Cao is an assistant professor in the Department of Finance, Chinese University of Hong Kong. He received his Ph.D. in finance from University of Texas at Austin in 2009 and B.A. in economics from Peking University in 2002. His research areas are empirical asset pricing, behavioral finance, and derivatives. His research specifically focuses on the return predictability and quantitative trading strategies using stocks and stock options. He has published in top finance journals such as Journal of Financial Economics and Journal of Financial and Quantitative Analysis. His work has been presented at top international finance conferences such as American Finance Association Annual Meeting (AFA) and The Financial Intermediation Research Society (FIRS) Conference. He was also awarded three Hong Kong RGC GRF/ECS grants and many other research grants from both academic and industry sponsors. He has received several research awards, including 1st CQAsia Academic Competition Award (2014) and the best paper prize at the 17th Conference on the Theories and Practices of Securities and Financial Markets (2009). He teaches undergraduate Investments and Ph.D. Empirical Asset Pricing, and has received an Outstanding Teaching Award of Faculty of Business Administration.

Everyone is welcome to attend the talk!

Venue: Room 513,
      William M.W. Mong Engineering Building (ERB),
      (Engineering Building Complex Phase 2)
      The Chinese University of Hong Kong.

The talk will be hosted by:
Prof. Nan Chen,
Department of Systems Engineering and Engineering Management,
The Chinese University of Hong Kong,

SEEM-5202 Website:

Friday, September 4, 2015 - 09:00 to 10:00