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An Empirical Portfolio Perspective on Option Pricing Anomalies


  • Joost Driessen
  • Pascal Maenhout


We empirically study the economic benefits of giving investors access to index options in the standard portfolio problem, analyzing both expected-utility and nonexpected-utility investors in order to understand who optimally buys and sells options. Using data on S&P 500 index options, CRRA investors find it always optimal to short out-of-the-money puts and at-the-money straddles. The option positions are economically and statistically significant and robust to corrections for transaction costs, margin requirements, and Peso problems. Loss-averse and disappointment-averse investors also optimally hold short option positions. Only with highly distorted probability assessments can we obtain positive portfolio weights for puts (cumulative prospect theory and anticipated utility) and straddles (anticipated utility). Copyright 2007, Oxford University Press.

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  • Joost Driessen & Pascal Maenhout, 2007. "An Empirical Portfolio Perspective on Option Pricing Anomalies," Review of Finance, European Finance Association, vol. 11(4), pages 561-603.
  • Handle: RePEc:oup:revfin:v:11:y:2007:i:4:p:561-603

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    References listed on IDEAS

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    Cited by:

    1. Dierkes, Maik & Erner, Carsten & Zeisberger, Stefan, 2010. "Investment horizon and the attractiveness of investment strategies: A behavioral approach," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1032-1046, May.
    2. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
    3. Judd, Kenneth L. & Leisen, Dietmar P.J., 2010. "Equilibrium open interest," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2578-2600, December.
    4. George M. Constantinides & Michal Czerwonko & Stylianos Perrakis, 2017. "Mispriced Index Option Portfolios," NBER Working Papers 23708, National Bureau of Economic Research, Inc.
    5. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    6. George M. Constantinides & Michal Czerwonko & Jens Carsten Jackwerth & Stylianos Perrakis, 2011. "Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence," Journal of Finance, American Finance Association, vol. 66(4), pages 1407-1437, August.
    7. Branger, Nicole & Hansis, Alexandra, 2012. "Asset allocation: How much does model choice matter?," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1865-1882.
    8. Lai, Ya-Wen, 2017. "Macroeconomic factors and index option returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 452-477.
    9. George Kapetanios & Michael Neumann & George Skiadopoulos, 2014. "Jumps in Option Prices and Their Determinants: Real-time Evidence from the E-mini S&P 500 Option Market," Working Papers 730, Queen Mary University of London, School of Economics and Finance.
    10. Rania HENTATI & Jean-Luc PRIGENT, "undated". "Structured Portfolio Analysis under SharpeOmega Ratio," EcoMod2010 259600073, EcoMod.
    11. Bertrand, Philippe & Prigent, Jean-luc, 2016. "Equilibrium of financial derivative markets under portfolio insurance constraints," Economic Modelling, Elsevier, vol. 52(PA), pages 278-291.
    12. Roman Kozhan & Anthony Neuberger & Paul Schneider, 2013. "The Skew Risk Premium in the Equity Index Market," Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2174-2203.
    13. Yanhui Chen & Kin Lai & Jiangze Du, 2014. "Modeling and forecasting Hang Seng index volatility with day-of-week effect, spillover effect based on ARIMA and HAR," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 4(2), pages 113-132, December.
    14. Philippe Bertrand & Jean-Luc Prigent, 2015. "On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds)," Finance, Presses universitaires de Grenoble, vol. 36(2), pages 67-105.
    15. repec:ipg:wpaper:2014-330 is not listed on IDEAS
    16. Alexandros Kostakis & Nikolaos Panigirtzoglou & George Skiadopoulos, 2011. "Market Timing with Option-Implied Distributions: A Forward-Looking Approach," Management Science, INFORMS, vol. 57(7), pages 1231-1249, July.
    17. Bjørn Eraker, 2013. "The performance of model based option trading strategies," Review of Derivatives Research, Springer, vol. 16(1), pages 1-23, April.
    18. Benzoni, Luca & Collin-Dufresne, Pierre & Goldstein, Robert S., 2011. "Explaining asset pricing puzzles associated with the 1987 market crash," Journal of Financial Economics, Elsevier, vol. 101(3), pages 552-573, September.
    19. Driessen, Joost & Maenhout, Pascal, 2013. "The world price of jump and volatility risk," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 518-536.
    20. Papantonis, Ioannis, 2016. "Volatility risk premium implications of GARCH option pricing models," Economic Modelling, Elsevier, vol. 58(C), pages 104-115.
    21. Brinkmann, Felix & Korn, Olaf, 2014. "Risk-adjusted option-implied moments," CFR Working Papers 14-07, University of Cologne, Centre for Financial Research (CFR).
    22. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.

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