Mispricing of S&P 500 Index Options

Posted: 17 Mar 2009

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: March 2009

Abstract

Widespread violations of stochastic dominance by 1-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 precrash 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 postcrash OTM calls contradict the notion that the problem lies primarily with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the postcrash period of 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.

Keywords: G10, G13

Suggested Citation

Constantinides, George M. and Jackwerth, Jens Carsten and Perrakis, Stylianos, Mispricing of S&P 500 Index Options (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 1247-1277, 2009. Available at SSRN: https://ssrn.com/abstract=1359522 or http://dx.doi.org/hhn009

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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Germany
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+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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