Are Equity Option Returns Abnormal? IPCA Says No
59 Pages Posted: 26 Aug 2022 Last revised: 12 Dec 2022
Date Written: December 12, 2022
We show that much of the profitability in equity option return strategies, that try to capture option mis-pricing by taking exposure to underlying volatility, can be explained by an IPCA model. The alpha reduction, relative to competing static factor models, is between 50% and 75% depending on the competing model and the type of option position.
Keywords: Option returns, IPCA, Alpha
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation
Goyal, Amit and Saretto, Alessio, Are Equity Option Returns Abnormal? IPCA Says No (December 12, 2022). Available at SSRN: https://ssrn.com/abstract=4194384 or http://dx.doi.org/10.2139/ssrn.4194384
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