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A Bayesian Stochastic Discount Factor for the Cross-Section of Individual Equity Options

Author

Listed:
  • Käfer, Niclas
  • Mörke, Mathis
  • Weigert, Florian
  • Wiest, Tobias

Abstract

We utilize Bayesian model averaging to estimate a stochastic discount factor (SDF) for single-stock options. A Bayesian model averaging SDF outperforms reduced-form benchmark models in-sample and out-of-sample in pricing option return anomalies and portfolios. We document that the SDF is dense in characteristics with the implied-realized volatility spread, option return momentum, and jump risk emerging as the most likely included factors. The option SDF exhibits a distinct business cycle pattern and aligns more closely with its counterpart in the stock market than in the bond market.

Suggested Citation

  • Käfer, Niclas & Mörke, Mathis & Weigert, Florian & Wiest, Tobias, 2026. "A Bayesian Stochastic Discount Factor for the Cross-Section of Individual Equity Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 61(4), pages 1632-1659, June.
    • Handle: RePEc:cup:jfinqa:v:61:y:2026:i:4:p:1632-1659_3
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