Uncertainty of Put-Call Parity Violation and Option Returns
47 Pages Posted: 4 Aug 2022
Date Written: May 1, 2022
This paper presents a new robust predictor for option returns: the uncertainty of put-call parity violation (VVS). We find that the delta-hedged equity option return decreases monotonically with VVS. Although VVS is highly correlated with the classical uncertainty and limit-to-arbitrage measures, the predictability still cannot be explained by standard factors such as jump and volatility risks, short-sale constraints, and stock lottery characteristics. It is also inconsistent with constrained option market makers, since the results are almost similar after controlling for market makers' order flows.
Keywords: Option returns, put-call parity violation, volatility-of-volatility
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation