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Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence

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  • GEORGE M. CONSTANTINIDES
  • MICHAL CZERWONKO
  • JENS CARSTEN JACKWERTH
  • STYLIANOS PERRAKIS

Abstract

American call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing. (JEL G11, G13, G14)

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 4 (08)
Pages: 1407-1437

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:4:p:1407-1437

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Cited by:
  1. Constantinides, George M. & Jackwerth, Jens Carsten & Perrakis, Stylianos, 2007. "Option Pricing: Real and Risk-Neutral Distributions," MPRA Paper 11637, University Library of Munich, Germany.
  2. George M. Constantinides & Jens Carsten Jackwerth & Alexi Savov, 2011. "The Puzzle of Index Option Returns," Working Paper Series of the Department of Economics, University of Konstanz 2011-17, Department of Economics, University of Konstanz.
  3. Peter Christoffersen & Mathieu Fournier & Kris Jacobs, 2013. "The Factor Structure in Equity Options," CREATES Research Papers 2013-47, School of Economics and Management, University of Aarhus.
  4. Perrakis, Stylianos & Boloorforoosh, Ali, 2013. "Valuing catastrophe derivatives under limited diversification: A stochastic dominance approach," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3157-3168.
  5. Alejandro Balbás & Beatriz Balbás & Raquel Balbás, 2013. "On the inefficiency of Brownian motions and heavier tailed price processes," Business Economics Working Papers id-13-01, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".

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