Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

This paper analyzes the early exercise of exchange-traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of full-ser...

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Bibliographic Details
Published in:The Journal of finance (New York) 2003-02, Vol.58 (1), p.37-70
Main Authors: Poteshman, Allen M., Serbin, Vitaly
Format: Article
Language:English
Subjects:
Call options
Discounts
Investors
Mathematical models
Put & call options
Securities trading
Statistical analysis
Stock dividends
Stock options
Stock prices
Stock shares
Stock transactions
Strike prices
Studies
Trade
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Summary:This paper analyzes the early exercise of exchange-traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of full-service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Rational and irrational exercise is triggered for discount and full-service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock.
ISSN:0022-1082
1540-6261
DOI:10.1111/1540-6261.00518