Learning and Index Option Returns

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 o...

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Bibliographic Details
Published inJournal of business & economic statistics Vol. 38; no. 2; pp. 327 - 339
Main Authors Bernales, Alejandro, Cortazar, Gonzalo, Salamunic, Luka, Skiadopoulos, George
Format Journal Article
LanguageEnglish
Published Alexandria Taylor & Francis 02.04.2020
Taylor & Francis Ltd
Subjects
Equilibrium model
Learning
Partial information
Put option returns
Structural breaks
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Summary: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.
ISSN:0735-0015
1537-2707
DOI:10.1080/07350015.2018.1505629