Does fundamental value run asset price formation process? Evidence from option price information content

Original Article

Does fundamental value run asset price formation process? Evidence from option price information content

Received (in revised form): 13th June 2016

Abderrahmen Aloulou

has a PhD (S.) in Finance, URECA Research Unit & Faculty of Economics and Management Sfax, Tunisia. His research interests include analyses of transactions, activity and prices of derivatives to explain the relationship between anticipations, behaviours and assets prices.

Siwar Ellouze

is a Professor of nance at the higher business school of Sfax, Tunisia. His research interests include portfolio management and behavioral nance.

Correspondence: Abderrahmen Aloulou, Sfax University, Sfax, Tunisia E-mail: [e-mail]

ABSTRACT The theory of efciency asserts that the existence of irrational investors does not affect market efciency by supporting the fact that their mistakes will be exploited by arbitrageurs who bring prices to efciency. The current paper seeks to nd out whether fundamental value governs the process of nancial asset price formation or else the perception and the convention made by the market about this value inuences this process. We focus on the impact of heterogeneous traders beliefs and expectations on the quality of their anticipation and the manner it inuences the process of asset price formation. By analyzing information content of options on the S&P TSX 60 Canadian index during January 1, 2012 to December 31, 2013, we validate that heterogeneity of traders expectations and switching affect the asset price formation process.

Journal of Asset Management (2017) 18, 255268. doi:10.1057/s41260-016-0032-5;published online 8 November 2016

KEYWORDS: rational expectations; asset price formation process; switching; heterogeneity; option prices information content

INTRODUCTION

Classical asset pricing theory assumes that changes in asset returns depend on changes in fundamentals. Several criticisms have been addressed to the classical nancial theory (De bondt and Thaler, 1985; Shefrin, 2001; Shiller, 2011, 2014,). Behavioral nance stipulates that excess returns of assets is not only explained by the fundamental but also by the investors

feeling (Baker and Wurgler, 2006, 2007; Yu and Yuan, 2011; Liao et al, 2011; Baker et al, 2012; Greenwood and Shleifer, 2014; Yang and Gao, 2014; Yang and Zhang, 2014). Shiller (2011, 2014) argues that the investors transactions reect the way with which they think then react on the market.

This paper aims to seek informational content of optional contract as elements to

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