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Explaining S&P500 option returns: an implied risk-adjusted approach

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  • David Volkmann

    (Georg-August-Universität Göttingen)

Abstract

The option mispricing puzzle states that realized option returns are inconsistent with option pricing models in perfect markets. This paper applies the approach by Brinkmann and Korn (Rev Deriv Res 21:149–173, 2018) to forecast S&P500 option returns via option-implied expectations of a risk-averse representative investor. The approach is able to explain S&P500 put option returns and achieves superior prediction results over standard option pricing models. However, none of the tested option pricing models can explain the highly negative mean realized S&P500 out-of-the-money call option returns due to the empirically U-shaped pricing kernel.

Suggested Citation

  • David Volkmann, 2021. "Explaining S&P500 option returns: an implied risk-adjusted approach," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 29(2), pages 665-685, June.
    • Handle: RePEc:spr:cejnor:v:29:y:2021:i:2:d:10.1007_s10100-019-00666-5
    DOI: 10.1007/s10100-019-00666-5
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    References listed on IDEAS

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    1. Donald R. Chambers & Matthew Foy & Jeffrey Liebner & Qin Lu, 2014. "Index Option Returns: Still Puzzling," The Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1915-1928.
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    7. Felix Brinkmann & Olaf Korn, 2018. "Risk-adjusted option-implied moments," Review of Derivatives Research, Springer, vol. 21(2), pages 149-173, July.
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    Cited by:

    1. Stephan Höcht & Dilip B. Madan & Wim Schoutens & Eva Verschueren, 2021. "It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option via Joint Physical and Pricing Density Modeling," Risks, MDPI, vol. 9(11), pages 1-19, November.

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    More about this item

    Keywords

    Option mispricing puzzle; Expected option return; U-shaped pricing kernel;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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