Ambiguity in Option Markets — Evidence from SEOs

Seasoned equity offerings (SEOs) typically provide investors with information, or signals, that are stock price relevant. This information, however, is generally intangible, meaning market participants have incomplete knowledge about its quality. Investors thus tend to regard it as ambiguous. To calculate a related ambiguity premium, we use straddle returns to explore the difference between option-implied and realised volatility following SEO events. After controlling for common risk factors, we find significantly positive alphas that can proxy for the ambiguity premium. In line with previous research, we find that the estimated ambiguity premium is positively correlated with firms' fundamental data intangibility, as proxied for by the skewness of stock returns