Why Are Put Options So Expensive?

Oleg Bondarenko ()
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Oleg Bondarenko: Department of Finance (MC 168), University of Illinois at Chicago, 601 S. Morgan St., Chicago, IL 60607, USA

Quarterly Journal of Finance (QJF), 2014, vol. 04, issue 03, 1-50

Abstract: This paper studies the "overpriced puts puzzle" — the finding that historical prices of the S&P 500 put options have been too high and incompatible with the canonical asset-pricing models. To investigate whether put returns could be rationalized by another, possibly non-standard equilibrium model, we implement the model-free methodology of Bondarenko [2003a, Statistical Arbitrage and Securities Prices,Review of Financial Studies16, 875–919]. The methodology requires no parametric assumptions on investors' preferences. Furthermore, it can be applied even when the sample is affected by certain selection biases (such as the Peso problem) and when investors' beliefs are incorrect. The main finding of the paper is thatnomodel within a studied class of models can possibly explain the put anomaly.

Keywords: Market efficiency hypothesis; rational learning; option valuation; risk-neutral density; peso problem; JEL Classification: G12; JEL Classification: G13; JEL Classification: G14 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (59)

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DOI: 10.1142/S2010139214500153

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