• Media type: E-Book
  • Title: Non-Linear CAPM : Evidence From In-The-Money Options Trading
  • Contributor: Pederzoli, Paola [VerfasserIn]; Sandulescu, Mirela [VerfasserIn]
  • imprint: [S.l.]: SSRN, 2022
  • Extent: 1 Online-Ressource (39 p)
  • Language: English
  • DOI: 10.2139/ssrn.4244127
  • Identifier:
  • Keywords: Minimum variance SDF ; Index Options ; Public Investors
  • Origination:
  • Footnote: Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 10, 2022 erstellt
  • Description: We investigate the cross-section of option returns using a model-free approach, by constructing a stochastic discount factor (SDF) that features minimal variance and accounts for frictions. We find that incorporating transaction costs in the form of bid-ask spreads is essential in order to obtain realistic positions in the optimal trading strategy that mainly invests in in-the-money call options. Empirically, we show that the out-of-sample pricing errors of the constrained SDF are 90% lower than the ones implied by the benchmark unconstrained SDF. Our findings document a strong link between the optimal portfolio accounting for transaction costs and the option positions held by public investors (non-intermediaries). This result suggests that public investors are the marginal investors in the options market. Finally, we show that the trading activity of customers in in-the-money call options has significant explanatory power for the cross-section of individual equity option returns
  • Access State: Open Access