The Review of Asset Pricing Studies Vol. 3 No. 2 2013

The Puzzle of Index Option Returns

George M. Constantinides¹; Jens Carsten Jackwerth²; Alexi Savov^3,4,5,6

¹ University of Chicago · ² University of Konstanz · ³ Supélec · ⁴ University of Applied Sciences and Arts of Southern Switzerland · ⁵ Shandong University of Political Science and Law · ⁶ New York University

Abstract

We construct a panel of S&P 500 Index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross-sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short-maturity out-of-the-money puts become economically and statistically insignificant.

DOI

10.1093/rapstu/rat004

Volume

3

Issue

2

Pages

229-257

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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