Journal article

Mispricing of Index Options with Respect to Stochastic Dominance Bounds?

BP2

  • 2021
Published in:
  • Critical Finance Review. - 2021, vol. 10, p. 21-55
English For one-month S\&P 500 index options, Constantinides, Jackwerth and Perrakis (2009) report widespread and substantial violations of stochastic dominance bounds. According to the subsequent study of Constantinides et al. (2011), the violations can be exploited to generate abnormal trading profits. The reported mispricing, which is far more extreme than known from the pricing kernel puzzle, calls into question that option markets meet the most basic requirements of rational pricing. However, we find that index options on the S\&P 500, EuroStoxx 50 and DAX are priced almost perfectly in line with stochastic dominance bounds when adjusting for (a) the general level of option prices, (b) conditional volatility and (c) put-call parity in order to determine the appropriate (dividend-adjusted) underlying index level. Our results indicate that index option markets might be much more efficient than previous literature suggests.
Faculty
Faculté des sciences économiques et sociales et du management
Department
Département des sciences du Management
Language
  • English
Classification
Economics
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License
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Persistent URL
https://folia.unifr.ch/unifr/documents/320354
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