Mispricing of S&P 500 Index Options
By George M. Constantinides, Jens Carsten Jackwerth, Stylianos Perrakis. 2006
174 citations recorded by the source corpus.
Widespread violations of stochastic dominance by one-month S&P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced if the distribution of the index return is estimated from time-series data. Substantial violations by post-crash OTM calls contradict the notion that the problem primarily lies with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the post-crash period 1988-1995 is followed by a substantial increase over 1997-2006 which may be due to the lower quality of the data but, in any case, does not provide evidence that the options market is becoming more rational over time.
Subfields: Finance
View Paper: https://www.semanticscholar.org/paper/9cbbdcdfb15dc9202ad55d8d1c16f3eb6ff22367
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In Finance
- Alexi Savov
- Jens Carsten Jackwerth
- George M. Constantinides
- Peter F. Christoffersen
- Ruslan Goyenko
- M. Karoui
- Kris Jacobs
- Carol Alexander
Citations in the corpus
- On the Timing and Pricing of Dividends (2011, unknown): “9Using closing prices from OptionMetrics for all quantities does not guarantee that the index value and option prices are recorded at the same time and induces substantial noise in our computations, see also Constantinides, Jackwerth, and Perrakis (2009)).”
- Explaining Asset Pricing Puzzles Associated with the 1987 Market Crash (2011, unknown): “…and Saretto (2009)) and the economic benefits of giving investors access to derivatives when they solve the portfolio choice problem (e.g., Constantinides et al. (2009), Driessen and Maenhout (2007), Liu and Pan (2003)). a decision-theoretic basis to the idea of crash aversion advocated…”
- The Puzzle of Index Option Returns (2013, methodology): “Coval and Shumway’s (2001) sample covers the period 1990-1995 and uses weekly holding period returns in the OEX and SPX markets for options written on the S&P 100 and S&P 500, respectively.”
- Illiquidity Premia in the Equity Options Market (2018, background): “Constantinides and Perrakis (2002, 2007), Oancea and Perrakis (2007), and Constantinides, Jackwerth, and Perrakis (2009) rely on a stochastic dominance approach to characterize bounds on option prices.”