Paper
Journal of Derivatives & Hedge Funds (2007) 13, 170–176. doi:10.1057/palgrave.jdhf.1850065
Option returns versus asset-pricing theory: Evidence from the European option market
Practical applications
This article analyses risk-return profiles in the European equity index option market. Judging from empirical results for a comprehensive database of option prices, inconsistencies with broadly accepted asset-pricing concepts become evident. The study could therefore serve as a starting point for actual profitable trading strategies and encourage further practical research in the area of risk-return profiles of equity (index) options.
Sascha Wilkens1
Correspondence: Sascha Wilkens, E-mail: Wilkens@gmx.de
1heads the Market Risk Management for equity derivatives in a large European commercial bank. He holds a Doctorate/PhD in Finance from the University of Münster, Germany and a Master's degree in Business Mathematics from the University of Hamburg, Germany. His research concentrates on empirical market studies and the pricing of derivative securities. This paper does not represent an official statement of the firm the author is affiliated with.
Received 23 April 2007; Revised 23 April 2007.
Abstract
Against the background of standard asset-pricing theory, this paper empirically investigates returns of index call and put options traded at the Eurex (European Exchange). We find that option returns are not fully consistent even with a very general asset-pricing framework. Under comparatively stronger Black–Scholes/CAPM assumptions, returns deviate significantly from expected values, though results are sensitive to option type, moneyness, and time-to-maturity. We also provide evidence that short positions in suitably chosen zero-beta straddle portfolios yield remarkable positive (excess) returns on average.
Keywords:
options, asset-pricing theory, CAPM, implied volatility
