Dynamic Equilibrium with Overpriced Put Options

26 Pages Posted: 1 Jun 2007

See all articles by Sergey Isaenko

Sergey Isaenko

Concordia University, Quebec - Department of Finance

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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.

Suggested Citation

Isaenko, Sergey, Dynamic Equilibrium with Overpriced Put Options. Economic Notes, Vol. 36, No. 1, pp. 1-26, February 2007, Available at SSRN: https://ssrn.com/abstract=989076 or http://dx.doi.org/10.1111/j.1468-0300.2007.00177.x

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)
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