57 Pages Posted: 22 Mar 2009 Last revised: 29 Apr 2016
Date Written: January 31, 2016
We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but are rather the result of widespread and highly persistent option mispricing driven by the incorrect treatment of non-smoothness in stock return variance. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects and non-smoothness in variance more generally. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.
Keywords: Nontrading, weekend effect, equity options
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation
Jones, Christopher S. and Shemesh, Joshua, Option Mispricing Around Nontrading Periods (January 31, 2016). AFA 2010 Atlanta Meetings Paper; Marshall School of Business Working Paper No. FBE 03-10. Available at SSRN: https://ssrn.com/abstract=1364721 or http://dx.doi.org/10.2139/ssrn.1364721