Learning and Index Option Returns

Abstract

Little is known about the economic sources that may generate the abnormal returns observed in put index options. We show that the learning process followed by investors may be one such source. We develop an equilibrium model under partial information in which a rational Bayesian learner prices put option contracts. Our model generates put option returns similar to the empirical returns of S&P 500 put index options. This result is not obtained when we analyse alternative setups of the model in which no learning process exists.

Keywords: Put Option Returns, Equilibrium Model, Partial Information, Learning, Structural Breaks

JEL Classification: D83, G13, G14, G17