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Mispriced Index Option Portfolios

Listed author(s):
  • George M. Constantinides
  • Michal Czerwonko
  • Stylianos Perrakis

The optimal portfolio of a utility-maximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zero-net-cost portfolio of S&P 500 options bought at their ask and written at their bid price in most months over 1990-2013. Dominance is prevalent when the ATM-IV is high, right skew is low, and option maturity is short. The portfolios include mostly calls and positions are overwhelmingly short. Similar results obtain with options on the CAC and DAX indices. The results are explained neither by priced factors nor a non-monotonic stochastic discount factor.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23708.

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Date of creation: Aug 2017
Handle: RePEc:nbr:nberwo:23708
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