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Are Equity Option Returns Abnormal? IPCA Says No

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Abstract

We show that much of the profitability in equity option return strategies, which try to capture option mispricing by taking exposure to underlying volatility, can be explained by an IPCA model. The alpha reduction, relative to competing static factor models, is between 50% and 75% depending on the computing model and the type of option position.

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  • Amit Goyal & Alessio Saretto, 2022. "Are Equity Option Returns Abnormal? IPCA Says No," Working Papers 2214, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:94684
    DOI: 10.24149/wp2214
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    Cited by:

    1. Weichuan Deng & Pawel Polak & Abolfazl Safikhani & Ronakdilip Shah, 2023. "A Unified Framework for Fast Large-Scale Portfolio Optimization," Papers 2303.12751, arXiv.org, revised Nov 2023.

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    More about this item

    Keywords

    option returns; IPCA; Alpha;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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