Index options became the most important traded contracts during their first year of existence. Two contracts, namely those on the S&P100 and the Major Markets Index, have a trading volume which typically surpasses the trading volume in all individual stock option contracts. In this paper, we examine the pricing of the options on the S&P100 and the Major Markets Index. Using intra‐day prices, we find the options frequently violate the arbitrage boundary, put/call parity, and are substantially mispriced relative to theoretical values. Our results suggest that tests of option pricing models may be more difficult than previously realized due to nonsynchronous prices, even using “real‐time” data from the exchanges.
This paper is a contribution to the Proceedings of the Workshop Complexity, Metastability and Nonextensivity held in Erice 20-26 July 2004, to be published by World Scientific. We propose a generalization to Merton's model for evaluating credit spreads. In his original work, a company's assets were assumed to follow a log-normal process. We introduce fat tails and skew into this model, along the same lines as in the option pricing model of Borland and Bouchaud (2004, Quantitative Finance 4) and illustrate the effects of each component. Preliminary empirical results indicate that this model fits well to empirically observed credit spreads with a parameterization that also matched observed stock return distributions and option prices.
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