Options and analysts : A study on the relationship between option implied volatility and analyst consensus recommendations

Abstract: The purpose of our thesis is to examine the relationship between option implied volatility and analyst consensus recommendation revisions. We offer a Swedish perspective on the growing popularity of equity options and its relationship with different stock market participants and returns. We chose the Swedish options market since it is substantially smaller in relation to the stock market than in countries such as the US, it is also not as studied. First, we conduct an event study using a fixed effects OLS model to determine the effect of analysts’ consensus recommendation revision. Second, we use a probit regression model to determine the probability of a revision given the option implied volatility. We find that there is generally a statistically significant relationship between option implied volatility and analyst consensus recommendation revisions as well as with abnormal returns, providing further discussion on the information sharing between the two markets and its participants.