The Puzzle of Index Option Returns

George Constantinides, Jens Carsten Jackwerth and Alexi Savov

The Review of Asset Pricing Studies, 2013, vol. 3, issue 2, 229-257

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.

JEL-codes: G11 G13 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (39)

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Related works:
Working Paper: The Puzzle of Index Option Returns (2012)
Working Paper: The Puzzle of Index Option Returns (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:3:y:2013:i:2:p:229-257.

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