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The Tradability Premium on the S&P 500 Index

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  • Christian Gourieroux
  • Joann Jasiak
  • Peng Xu

Abstract

We derive a coherent multifactor model for pricing various derivatives written on the same underlying (potentially nontradable) asset. We show the difference between a case in which the underlying asset is self-financed and tradable and a case in which it is not. In the first case, an additional arbitrage condition must be introduced, which implies nontrivial parameter restrictions. These restrictions can be empirically tested to check whether the derivatives are priced as if the underlying were self-financed and tradable. This methodology allows us to define the tradability premium. As an illustration, we compute a daily tradability premium for the S&P 500.

Suggested Citation

  • Christian Gourieroux & Joann Jasiak & Peng Xu, 2016. "The Tradability Premium on the S&P 500 Index," Journal of Financial Econometrics, Oxford University Press, vol. 14(3), pages 461-495.
    • Handle: RePEc:oup:jfinec:v:14:y:2016:i:3:p:461-495.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbv019
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    References listed on IDEAS

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    1. Andersen, Torben G. & Fusari, Nicola & Todorov, Viktor, 2015. "The risk premia embedded in index options," Journal of Financial Economics, Elsevier, vol. 117(3), pages 558-584.
    2. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May.
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