Why are Put Options so Expensive?
Quarterly Journal of Finance, Vol. 4, 1450015 [50 pages], 2014
40 Pages Posted: 29 Apr 2003 Last revised: 6 Apr 2015
Date Written: April 1, 2003
This paper studies the "overpriced puts puzzle'' -- the finding that historical prices of the S&P 500 put options have been too high and incompatible with the canonical asset-pricing models, such as CAPM and Rubinstein (1976) model. To investigate whether put returns could be rationalized by another, possibly nonstandard equilibrium model, we implement the model-free methodology of Bondarenko (2003a). The methodology requires no parametric assumptions on investors' preferences. Furthermore, it can be applied even when the sample is affected by certain selection biases (such as the Peso problem) and when investors' beliefs are incorrect. The main finding of the paper is that no model within a studied class of models can possibly explain the put anomaly.
Keywords: Market Market Efficiency Hypothesis, Rational Learning, Option Valuation, Risk-Neutral Density, Peso Problem
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation