The Tradability Premium on the S&P 500 Index

Christian Gourieroux, Joann Jasiak and Peng Xu

Journal of Financial Econometrics, 2016, vol. 14, issue 3, 461-495

Abstract: We derive a coherent multifactor model for pricing various derivatives written on the same underlying (potentially nontradable) asset. We show the difference between a case in which the underlying asset is self-financed and tradable and a case in which it is not. In the first case, an additional arbitrage condition must be introduced, which implies nontrivial parameter restrictions. These restrictions can be empirically tested to check whether the derivatives are priced as if the underlying were self-financed and tradable. This methodology allows us to define the tradability premium. As an illustration, we compute a daily tradability premium for the S&P 500.

Date: 2016
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