Estimating the Early Exercise Premium of American Put Index Options
International Journal of Banking and Finance, 2008/09 Vol. 6. Number 1: 2008: 31-47
9 Pages Posted: 2 May 2019
Date Written: July 12, 2008
This paper examines empirically the value of early exercise by testing the ability of two American put valuation models to predict the early exercise premium for the S&P 100 American put options. An accuracy test and a quality test are performed on (1) the MacMillan, Barone-Adesi and Whaley model, and (2) the Carr, Jarrow and Myneni model. The test results show that early exercise premium is significant regardless of moneyness. Moreover, consistent with the theory, the value of early exercise is significantly negatively related to moneyness and interest rates and significantly positively related to time to maturity and to the volatility of the underlying index. Both American put valuation models examined do not fully capture the value of early exercise embedded in American put prices.
Keywords: Option Prices, Early Exercise, Moneyness, S&P American Put Option
JEL Classification: G13.
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