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

Volkmann, David S.

doi:10.1007/s10100-019-00666-5

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Cited by 2 publications

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“…Cuesdeanu and Jackwerth (2018b) review the literature on and confirm the existence of this so-called pricing kernel puzzle, the disagreement between theoretical predictions of standard option pricing theory and empirics. Among others, Cuesdeanu and Jackwerth (2018a), Sichert (2020) and Volkmann (2021) have recently reported evidence on a locally increasing, U-shaped pricing kernel.…”

Section: Introductionmentioning

confidence: 96%

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option Via Joint Physical and Pricing Density Modeling

et al. 2020

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Section: Introductionmentioning

confidence: 96%

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option Via Joint Physical and Pricing Density Modeling

et al. 2020

View full text Add to dashboard Cite

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option via Joint Physical and Pricing Density Modeling

Höcht¹,

Madan

Schoutens

et al. 2021

Risks

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It is generally said that out-of-the-money call options are expensive and one can ask the question from which moneyness level this is the case. Expensive actually means that the price one pays for the option is more than the discounted average payoff one receives. If so, the option bears a negative risk premium. The objective of this paper is to investigate the zero-risk premium moneyness level of a European call option, i.e., the strike where expectations on the option’s payoff in both the P- and Q-world are equal. To fully exploit the insights of the option market we deploy the Tilted Bilateral Gamma pricing model to jointly estimate the physical and pricing measure from option prices. We illustrate the proposed pricing strategy on the option surface of stock indices, assessing the stability and position of the zero-risk premium strike of a European call option. With small fluctuations around a slightly in-the-money level, on average, the zero-risk premium strike appears to follow a rather stable pattern over time.

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

Cited by 2 publications

References 26 publications

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option Via Joint Physical and Pricing Density Modeling

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option Via Joint Physical and Pricing Density Modeling

It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option via Joint Physical and Pricing Density Modeling

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