Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence

56 Pages Posted: 18 Mar 2008 Last revised: 27 Jul 2011

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Michal Czerwonko

Concordia University

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: July 26, 2010

Abstract

American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out of sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk averse investor holding the market and cash, net of transaction costs and bid ask spreads. The results are economically significant and robust.

Keywords: option mispricing, futures options, derivatives pricing, stochastic dominance, transaction costs, market efficiency

JEL Classification: G11, G13, G14

Suggested Citation

Constantinides, George M. and Czerwonko, Michal and Jackwerth, Jens Carsten and Perrakis, Stylianos, Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence (July 26, 2010). Fama-Miller Working Paper ; Chicago Booth Research Paper No. 11-23. Available at SSRN: https://ssrn.com/abstract=1106962 or http://dx.doi.org/10.2139/ssrn.1106962

George M. Constantinides

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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United States
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National Bureau of Economic Research (NBER)

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Michal Czerwonko (Contact Author)

Concordia University ( email )

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Montreal, Quebec H3G 1M8
Canada

Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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