IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v17y2004i1p207-238.html
   My bibliography  Save this article

Options Trading and the CAPM

Author

Listed:
  • Joel M. Vanden

Abstract

This 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.

Suggested Citation

  • Joel M. Vanden, 2004. "Options Trading and the CAPM," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 207-238.
    • Handle: RePEc:oup:rfinst:v:17:y:2004:i:1:p:207-238
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhg026
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Husmann, Sven & Todorova, Neda, 2011. "CAPM option pricing," Finance Research Letters, Elsevier, vol. 8(4), pages 213-219.
    2. 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.
    3. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.
    4. Antonio Diez De Los Rios & René Garcia, 2011. "Assessing and valuing the nonlinear structure of hedge fund returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 193-212, March.
    5. Chang, Bo Young & Christoffersen, Peter & Jacobs, Kris, 2013. "Market skewness risk and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(1), pages 46-68.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. 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.
    8. 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.
    9. Anthonisz, Sean A., 2012. "Asset pricing with partial-moments," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2122-2135.
    10. Husmann, Sven, 2005. "On Estimating an Asset's Implicit Beta," Discussion Papers 238, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    11. Hui Guo & Christopher J. Neely & Jason Higbee, 2008. "Foreign Exchange Volatility Is Priced in Equities," Financial Management, Financial Management Association International, vol. 37(4), pages 769-790, December.
    12. Arısoy, Yakup Eser & Altay-Salih, Aslıhan & Pınar, Mustafa Ç, 2014. "Optimal multi-period consumption and investment with short-sale constraints," Finance Research Letters, Elsevier, vol. 11(1), pages 16-24.
    13. R. Jared DeLisle & Bong Soo Lee & Nathan Mauck, 2016. "The dynamic relation between options trading, short selling, and aggregate stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 645-671, October.
    14. Zhenjiang Qin, 2012. "Heterogeneous Beliefs, Public Information, and Option Markets," CREATES Research Papers 2012-23, Department of Economics and Business Economics, Aarhus University.
    15. Jose Faias & Pedro Santa-Clara, 2011. "Optimal Option Portfolio Strategies," EcoMod2011 3041, EcoMod.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:17:y:2004:i:1:p:207-238. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.