Mispricing of S&P 500 Index Options

George Constantinides, Jens Carsten Jackwerth and Stylianos Perrakis ()

No 14544, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Widespread violations of stochastic dominance by one-month S&P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced if the distribution of the index return is estimated from time-series data. Substantial violations by post-crash OTM calls contradict the notion that the problem primarily lies with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the post-crash period 1988-1995 is followed by a substantial increase over 1997-2006 which may be due to the lower quality of the data but, in any case, does not provide evidence that the options market is becoming more rational over time.

JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-bec and nep-fmk
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Review of Financial Studies, March 2009

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Journal Article: Mispricing of S&P 500 Index Options (2009)
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