The Puzzle of Index Option Returns
George M. Constantinides
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Jens Carsten Jackwerth
University of Konstanz - Department of Economics
New York University (NYU) - Department of Finance
February 9, 2012
Fama-Miller Working Paper
Chicago Booth Research Paper No. 11-24
We document that leverage-adjusted returns on S&P 500 index call and put portfolios are decreasing in their strike-to-price ratio over 1986-2010, contrary to the prediction of the Black-Scholes-Merton model. We test a large number of plausible unconditional factor models and find that only factors which capture jumps in the market index and jumps in the market volatility and, to a lesser extent, volatility and liquidity reasonably explain the cross-section of index options. The principal finding is that these factors require economically and statistically different factor premia on subsamples split across type (calls and puts), maturity, and moneyness, pointing towards market segmentation.
Number of Pages in PDF File: 42
Keywords: index option returns, option mispricing, volatility jumps, price jumps, liquidity, market efficiency
JEL Classification: G11, G13, G14working papers series
Date posted: October 21, 2009 ; Last revised: September 25, 2012
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