Index Option Prices and Stock Market Momentum

Kaushik Amin, Joshua D. Coval and H. Nejat Seyhun
Additional contact information
Kaushik Amin: Lehman Brothers
Joshua D. Coval: Harvard University
H. Nejat Seyhun: University of Michigan

The Journal of Business, 2004, vol. 77, issue 4, 835-874

Abstract: We test the prediction of standard option pricing models that there should be no relation between option prices and past stock market movements. Using the Standard and Poor's 100 index options (OEX options) prices from 19831995, we document that OEX calls are significantly overvalued relative to OEX puts after large stock price increases. The reverse is true after large stock price decreases. These valuation effects are both economically and statistically significant. Our results suggest that past stock returns exert an important influence on index option prices.

Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:835-874

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