Mispricing of S&P 500 Index Options

50 Pages Posted: 15 Jan 2009 Last revised: 29 Sep 2010

See all articles by George M. Constantinides

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

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: December 2008

Abstract

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.

Suggested Citation

Constantinides, George M. and Jackwerth, Jens Carsten and Perrakis, Stylianos, Mispricing of S&P 500 Index Options (December 2008). NBER Working Paper No. w14544. Available at SSRN: https://ssrn.com/abstract=1327217

George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

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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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