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Index Option Prices and Stock Market Momentum

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Author Info

  • Kaushik Amin

    (Lehman Brothers)

  • Joshua D. Coval

    (Harvard University)

  • H. Nejat Seyhun

    (University of Michigan)

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    Abstract

    We test the prediction of standard option pricing models that there should be no relation between option prices and past stock market movements. Using the Standard and Poor's 100 index options (OEX options) prices from 19831995, we document that OEX calls are significantly overvalued relative to OEX puts after large stock price increases. The reverse is true after large stock price decreases. These valuation effects are both economically and statistically significant. Our results suggest that past stock returns exert an important influence on index option prices.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 77 (2004)
    Issue (Month): 4 (October)
    Pages: 835-874

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    Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:835-874

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2013. "The Joint Cross Section of Stocks and Options," NBER Working Papers 19590, National Bureau of Economic Research, Inc.
    2. Chuang, Wen-I & Huang, Teng-Ching & Lin, Bing-Huei, 2013. "Predicting volatility using the Markov-switching multifractal model: Evidence from S&P 100 index and equity options," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 168-187.
    3. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    4. CorĂ², Filippo & Dufour, Alfonso & Varotto, Simone, 2013. "Credit and liquidity components of corporate CDS spreads," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5511-5525.
    5. Chalamandaris, Georgios & Rompolis, Leonidas S., 2012. "Exploring the role of the realized return distribution in the formation of the implied volatility smile," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1028-1044.
    6. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    7. Rodriguez, J.C., 2007. "Option Pricing and Momentum," Discussion Paper 2007-93, Tilburg University, Center for Economic Research.
    8. Shackleton, Mark B. & Voukelatos, Nikolaos, 2013. "Hedging efficiency in the Greek options market before and after the financial crisis of 2008," Journal of Multinational Financial Management, Elsevier, vol. 23(1), pages 1-18.
    9. Chiang, Min-Hsien & Huang, Hsin-Yi, 2011. "Stock market momentum, business conditions, and GARCH option pricing models," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 488-505, June.

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