Options Trading and the CAPM
AbstractThis article studies equilibrium asset pricing when agents face nonnegative wealth constraints. In the presence of these constraints it is shown that options on the market portfolio are nonredundant securities and the economy's pricing kernel is a function of both the market portfolio and the nonredundant options. This implies that the options should be useful for explaining risky asset returns. To test the theory, a model is derived in which the expected excess return on any risky asset is linearly related (via a collection of betas) to the expected excess return on the market portfolio and to the expected excess returns on the nonredundant options. The empirical results indicate that the returns on traded index options are relevant for explaining the returns on risky asset portfolios. Copyright 2004, Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 17 (2004)
Issue (Month): 1 ()
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- Antonio Diez de los Rios & René Garcia, 2011. "The option CAPM and the performance of hedge funds," Review of Derivatives Research, Springer, vol. 14(2), pages 137-167, July.
- Brennan, Michael J & LIU, XIAOQUAN & Xia, Yihong, 2005. "Option Pricing Kernels and the ICAPM," University of California at Los Angeles, Anderson Graduate School of Management qt4d90p8ss, Anderson Graduate School of Management, UCLA.
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- Bakshi, Gurdip & Madan, Dilip & Panayotov, George, 2010. "Returns of claims on the upside and the viability of U-shaped pricing kernels," Journal of Financial Economics, Elsevier, vol. 97(1), pages 130-154, July.
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