Signals from the Equity and Options Markets for Stock Selection

Kenneth M. Conrad

Advisor: Bryan D Caplan, PhD, Department of Economics

Committee Members: Garett Jones, Gerald Hanweck

Carow Hall, #11a
November 28, 2012, 01:00 PM to 11:00 AM


This dissertation examines signals from the equity and equity options markets and their ability to predict future stock price movements. Within the equity market, this dissertation determines that momentum consistency is distinct from momentum and is a helpful tool in stock selection. Furthermore, the momentum consistency factor described in Chapter 1 is evidence of the representativeness heuristic in the stock market. Chapters 2 and 3 analyze signals from open interest and implied volatility, respectively, within the options market. Chapter 2 examines call-put ratios that isolate option activity over different times to expiry and different levels on leverage and finds that call-put ratios that focus solely on the most leveraged options with the shortest time to expiry make the strongest predictor of future stock price performance and that this may be indicative of Prospect Theory. Chapter 3 studies signals from the implied volatility surface for individual stocks and finds that option skew and relative volatility contain information that is helpful in stock-picking.