Wildcard options are embedded in many derivative contracts. They arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position. This paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the S&P 100 index option contract. The results show that wildcard options can account for an economically significant fraction of S&P 100 index option value.

This study analyzes the effects of changes in S&P 500 index composition from January 1986 through June 1994, a period during which Standard and Poor's began its practice of preannouncing changes five days beforehand. The new announcement practice has given rise to the 'S&P game' and has altered the way stock prices react. The authors find that prices increase abnormally from the close on the announcement day to the close on the effective day. The overall increase is greater than under the old announcement policy, although part of the increase reverses after the stock is included in the index.

The authors provide new evidence regarding the degree of integration among markets for stocks, futures, and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, their analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock-market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets.

Using transaction data on the S&P 100 index options, the authors study the effect of valuation simplifications that are commonplace in previous research on the time-series properties of implied market volatility. Using an American-style algorithm that accounts for the discrete nature of the dividends on the S&P 100 index, they find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level. Negative serial correlation is also induced by a bid/ask price effect if a single option is used to estimate implied volatility. In addition, the authors find that these same effects induce spurious (and unreasonable) negative cross-correlations between the changes in call and put implied volatility.

This study investigates intraday relations between price changes and trading volumes of options and stocks for a sample of firms whose options traded on the Chicago Board Options Exchange during the first quarter of 1986. After purging the price change series of the effects of bid/ask spreads, multivariate time-series analysis is used to estimate the lead/lag relation between the price changes in the option and stock markets. The results indicate that price changes in the stock market lead the option market by as much as fifteen minutes. The analysis of trading volume indicates that the stock market lead may be even longer.

Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function (DVF) option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black–Scholes (1973) implied volatilities across exercise prices and times to expiration.

This paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the S&P 500 equity futures option market. The American futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in‐the‐money and to the option's time to expiration. The models are also shown to generate abnormal risk‐adjusted rates of return after transaction costs. The joint hypothesis that the American futures option pricing models are correctly specified and that the S&P 500 futures option market is efficient is refuted, at least for the sample period January 28, 1983 through December 30, 1983.

The development of asset pricing models that rely on instrumental variables together with the increased availability of easily accessible economic time-series have renewed interest in predicting security returns. Evaluating the significance of these new research findings, however, is no easy task. Because these asset pricing theory tests are not independent, classical methods of assessing goodness-of-fit are inappropriate. This study investigates the distribution of the maximal R-square when k of m regressors are used to predict security returns. The authors provide a simple procedure that adjusts critical R-square values to account for selecting variables by searching among potential regressors.

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. The authors propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. The authors' analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced.