NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Mispricing of S&P 500 Index Options

George M. Constantinides, Jens Carsten Jackwerth, Stylianos Perrakis

NBER Working Paper No. 14544
Issued in December 2008
NBER Program(s):   AP

Widespread violations of stochastic dominance by one-month S&P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced if the distribution of the index return is estimated from time-series data. Substantial violations by post-crash OTM calls contradict the notion that the problem primarily lies with the left-hand tail of the index return distribution and that the smile is too steep. The decrease in violations over the post-crash period 1988-1995 is followed by a substantial increase over 1997-2006 which may be due to the lower quality of the data but, in any case, does not provide evidence that the options market is becoming more rational over time.

download in pdf format
   (290 K)

email paper

This paper is available as PDF (290 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14544

Published: Review of Financial Studies, March 2009

Users who downloaded this paper also downloaded these:
Backus, Chernov, and Martin w15240 Disasters implied by equity index options
Constantinides, Czerwonko, Jackwerth, and Perrakis w16302 Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence
Benzoni, Collin-Dufresne, and Goldstein w11861 Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options
Collin-Dufresne, Goldstein, and Yang w15734 On the Relative Pricing of long Maturity S&P 500 Index Options and CDX Tranches
Philippon and Sannikov w13584 Real Options in a Dynamic Agency Model, with Applications to Financial Development, IPOs, and Business Risk
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us