MISPRICED INDEX OPTION PORTFOLIOS
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Date
2019
Authors
Constantinides, George M.
Czerwonko, Michal
Perrakis, Stylianos
Journal Title
Journal ISSN
Volume Title
Publisher
Financial Management
Abstract
In model-free out-of-sample tests, we find that the optimal portfo lio of a utility maximizing investor trading in the S&P500 Index, cash,
and index options bought at ask and written at bid prices stochas tically dominates the optimal portfolio without options and yields
returns with higher mean and lower volatility in most months from
1990 to 2013. Unlike earlier claims of overpriced puts, our portfolios
include mostly short calls and are particularly profitable when matu rity is short and volatility is high. Similar results are obtained with the
CAC and DAX indices. Neither priced factors nor a nonmonotonic
stochastic discount factor explains the excess returns.
Description
Keywords
Type of access: Open Access, portfolio
Citation
Constantinides, G. M., Czerwonko, M., & Perrakis, S. (2019). Mispriced index option portfolios. Financial Management, 49(2), 297–330. https://doi.org/10.1111/fima.12288