The Puzzle of Index Option Returns

George Constantinides, Jens Carsten Jackwerth () and Alexi Savov ()
Additional contact information
Jens Carsten Jackwerth: Department of Economics, University of Konstanz, Germany
Alexi Savov: New York University, USA

No 2012-35, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: We construct a panel of S&P 500 index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short maturity out-of-the-money puts become economically and statistically insignificant.

Keywords: index option mispricing; linear factor pricing; price jumps; volatility jumps; volatility; liquidity; delevered returns (search for similar items in EconPapers)
JEL-codes: G11 G13 G14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2012-09-07
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.uni-konstanz.de/FuF/wiwi/workingpaperse ... erth-Savov_35-12.pdf (application/pdf)

Related works:
Journal Article: The Puzzle of Index Option Returns (2013)
Working Paper: The Puzzle of Index Option Returns (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:knz:dpteco:1235

Ordering information: This working paper can be ordered from
https://www.wiwi.uni-konstanz.de/en

Access Statistics for this paper

More papers in Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz Contact information at EDIRC.
Bibliographic data for series maintained by Office Ursprung ( this e-mail address is bad, please contact ).