Dynamic Equilibrium with Overpriced Put Options

26 Pages Posted: 4 Apr 2006

See all articles by Sergey Isaenko

Sergey Isaenko

Concordia University, Quebec - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

It is a well-known anomaly that prices of put options are too high when options are out-of-the-money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out-of-the-money. Overpricing is due to the presence of short-sale constraints on trading stocks and derivatives, as well as the heterogeneity between investors. We confirm the predicting power of the model by comparing its implications with existing empirical results.

Keywords: Derivatives, equilibrium, arbitrage

JEL Classification: D52, G12, G13

Suggested Citation

Isaenko, Sergey, Dynamic Equilibrium with Overpriced Put Options (November 2004). Available at SSRN: https://ssrn.com/abstract=619304 or http://dx.doi.org/10.2139/ssrn.619304

Sergey Isaenko (Contact Author)

Concordia University, Quebec - Department of Finance ( email )

John Molson School of Business
Concordia University. 1455 de Maisonneuve Blvd.W.
Montreal, Quebec, H3G 1M8
Canada
1-514-848-2424 ext.2797 (Phone)
1-514-848-4500 (Fax)

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