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Disagreement in Market Index Options

Author

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  • Guilherme Salome
  • George Tauchen
  • Jia Li

Abstract

We generate new evidence on disagreement among traders in the S&P 500 options market from high-frequency intraday price and volume data. Inference on disagreement is based on a model where investors observe public information but agree to disagree on its interpretation; disagreement among investors is captured by the volume–volatility elasticity. For options, there are two natural variables related to disagreement: moneyness and tenor, which we relate to disagreement about the distribution of the market index at different quantiles and times. The estimated volume–volatility elasticity equals unity for options near the money and close to expiration, which is consistent with the case of no disagreement among investors. In contrast, the elasticity estimates decrease with increases in the absolute value of moneyness, indicating investors have a higher disagreement about rare events. Likewise, the elasticity decreases with increases in tenor, implying higher investors’ disagreement about more distant events.

Suggested Citation

  • Guilherme Salome & George Tauchen & Jia Li, 2024. "Disagreement in Market Index Options," Journal of Financial Econometrics, Oxford University Press, vol. 22(4), pages 1006-1041.
    • Handle: RePEc:oup:jfinec:v:22:y:2024:i:4:p:1006-1041.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbad017
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    More about this item

    Keywords

    disagreement; high-frequency data; market index; public information; SPX options; volume–volatility elasticity;
    All these keywords.

    JEL classification:

    • G4 - Financial Economics - - Behavioral Finance

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