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Learning and Index Option Returns

Author

Listed:
  • Alejandro Bernales
  • Gonzalo Cortazar
  • Luka Salamunic
  • George Skiadopoulos

Abstract

Little is known about the economic sources that may generate the abnormal returns observed in put index options. We show that the learning process followed by investors may be one such source. We develop an equilibrium model under partial information in which a rational Bayesian learner prices put option contracts. Our model generates put option returns similar to the empirical returns of S&P 500 put index options. This result is not obtained when we analyze alternative setups of the model in which no learning process exists.

Suggested Citation

  • Alejandro Bernales & Gonzalo Cortazar & Luka Salamunic & George Skiadopoulos, 2020. "Learning and Index Option Returns," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(2), pages 327-339, April.
    • Handle: RePEc:taf:jnlbes:v:38:y:2020:i:2:p:327-339
    DOI: 10.1080/07350015.2018.1505629
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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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