Mispriced Index Option Portfolios

George Constantinides, Michal Czerwonko and Stylianos Perrakis ()

No 23708, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The optimal portfolio of a utility-maximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zero-net-cost portfolio of S&P 500 options bought at their ask and written at their bid price in most months over 1990-2013. Dominance is prevalent when the ATM-IV is high, right skew is low, and option maturity is short. The portfolios include mostly calls and positions are overwhelmingly short. Similar results obtain with options on the CAC and DAX indices. The results are explained neither by priced factors nor a non-monotonic stochastic discount factor.

JEL-codes: G10 G11 G13 G23 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-upt
Note: AP
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Published as George M. Constantinides & Michal Czerwonko & Stylianos Perrakis, 2020. "Mispriced index option portfolios," Financial Management, vol 49(2), pages 297-330.

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Journal Article: Mispriced index option portfolios (2020)
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