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Informational content of options around analyst recommendations

Qingxia Wang (The University of Queensland, Brisbane, Australia)
Robert Faff (Bond University, Gold Coast, Australia) (The University of Queensland, Brisbane, Australia)
Min Zhu (The University of Queensland, Brisbane, Australia)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 20 July 2021

Issue publication date: 11 May 2022




More studies have investigated the relation between option measures and stock returns during scheduled corporate events. This study adds to the literature and investigates the informational role of options concerning stock returns following unscheduled corporate news events. The authors focus on individual analysts' recommendation changes rather than consensus revisions, as the recommendation consensus might discard a large amount of potentially valuable information in the aggregation process.


Based on the econometric model, the authors follow Bakshi et al. (2003) to construct the model-free option implied measures. The authors further decompose the implied option variance into upside and downside components. In such a way, the different informational roles of call and put options can be distinguished. A variety of regression analyses are conducted to examine the predictive power of option implied measures, and the ordered probit model is used to test the tipping hypothesis of analyst recommendations.


This study’s results show that the option market impounds the “valuable” firm-specific news; thus, the pre-event option market is strongly related to stock returns around recommendations even though recommendation changes are largely “unscheduled”. At the same time, these results suggest that upside (good) and downside (bad) implied volatilities contain distinctive information on subsequent stock returns.


This study provides new evidence that an increase in upside (downside) volatility around analyst recommendation changes would increase the probability that analysts upgrade (downgrade) the stock. The findings provide implications for investors and risk managers in making investment decisions.



The authors thank Alfred Yawson (Editor-in-Chief) and an anonymous referee for their helpful suggestions that greatly improved this paper. The authors also thank Kam Fong Chan, David Gallagher, Khoa Hoang, Maggie Liu, Casavecchia, Lorenzo, Suman Neupane-Joshi, Buhui Qiu, Eric Tan, Kelvin Tan, and seminar participants at Financial Market and Corporate Governance Conference 2019, Sydney, for their valuable comments and suggestions. The authors are also grateful for Kam Fong Chan's assistance on part of programming.


Wang, Q., Faff, R. and Zhu, M. (2022), "Informational content of options around analyst recommendations", International Journal of Managerial Finance, Vol. 18 No. 3, pp. 445-465.



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