The Puzzle of Index Option Returns


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CONSTANTINIDES, George M., Jens Carsten JACKWERTH, Alexi SAVOV, 2013. The Puzzle of Index Option Returns. In: Review of Asset Pricing Studies. 3(2), pp. 229-257. ISSN 2045-9920. eISSN 2045-9939

@article{Constantinides2013Puzzl-24854, title={The Puzzle of Index Option Returns}, year={2013}, doi={10.1093/rapstu/rat004}, number={2}, volume={3}, issn={2045-9920}, journal={Review of Asset Pricing Studies}, pages={229--257}, author={Constantinides, George M. and Jackwerth, Jens Carsten and Savov, Alexi} }

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. Savov, Alexi 2013 Jackwerth, Jens Carsten 2013-10-16T13:18:59Z Constantinides, George M. Constantinides, George M. Jackwerth, Jens Carsten The Puzzle of Index Option Returns Savov, Alexi deposit-license eng 2013-10-16T13:18:59Z Review of Asset Pricing Studies ; 3 (2013), 2. - S. 229-257

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