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Abstract:
A new measure of consumption -- garbage -- is more volatile and more correlated with stocks than the standard measure, NIPA consumption expenditure. A garbage-based CCAPM matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium-risk-free rate puzzle. These results carry through to European data. In a cross section of size, value, and industry portfolios, garbage growth is priced and drives out NIPA expenditure growth.
consumption-based asset pricing, equity premium, risk aversion
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Abstract:
We document that the leverage-adjusted returns on S&P 500 index calls and puts are decreasing in their strike-to-price ratio over 1986-2007, contrary to the prediction of the Black-Scholes-Merton model; and the leverage-unadjusted returns on S&P 500 index calls are decreasing in their strike-to-price ratio, contrary to the prediction and empirical results of Coval and Shumway (2001). Several factor models are tested and fail to explain the cross-section of option returns. Two option-specific factors, the change in monthly OTM put volume and the change in the VIX index, have some explanatory power when the factor premia are estimated from the universe of options but large alphas remain when the premia are estimated from equities. The three Fama-French factors leave large alphas even when the premia are estimated from options.
index options, option mispricing, derivatives, risk premia, market efficiency
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