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The Puzzle of Index Option Returns

Author

Listed:
  • George M. Constantinides

    (University of Chicago and NBER, USA)

  • Jens Carsten Jackwerth

    (Department of Economics, University of Konstanz, Germany)

  • Alexi Savov

    (New York University, USA)

Abstract

We construct a panel of S&P 500 index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short maturity out-of-the-money puts become economically and statistically insignificant.

Suggested Citation

  • George M. Constantinides & Jens Carsten Jackwerth & Alexi Savov, 2012. "The Puzzle of Index Option Returns," Working Paper Series of the Department of Economics, University of Konstanz 2012-35, Department of Economics, University of Konstanz.
    • Handle: RePEc:knz:dpteco:1235
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    index option mispricing; linear factor pricing; price jumps; volatility jumps; volatility; liquidity; delevered returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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