Options on Index Futures Profitable for Risk Averse Investors - Empirical Evidence

Options on Index Futures Profitable for Risk Averse Investors - Empirical Evidence

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NBER WORKING PAPER SERIES ARE OPTIONS ON INDEX FUTURES PROFITABLE FOR RISK AVERSE INVESTORS? EMPIRICAL EVIDENCE George M. Constantinides Michal Czerwonko Jens Carsten Jackwerth Stylianos Perrakis Working Paper 16302 http://www.nber.org/papers/w16302 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 2010 We thank Oleg Bondarenko, Wolfgang Buehler, Jim Hodder, Robert Merton, Ingmar Nolte, Myron Scholes, Sorin Sorescu, Suresh Sundaresan, Michael Wolf, Campbell Harvey (the editor), the anonymous associate editor and referees, participants at the Second Mont Tremblant Risk Management conference, the ESSFM Gerzensee 2008 conference, the 2008 Conference on Financial Innovation at Vanderbilt University, the 2008 International Conference on Price, Liquidity, and Credit Risks at Konstanz University, seminars at Mannheim University, Tel Aviv University, the University of Cyprus, and Zurich University, and especially Russell Davidson for insightful comments and constructive criticism. We remain responsible for errors and omissions. Constantinides acknowledges financial support from the Center for Research in Security Prices, University of Chicago. Czerwonko and Perrakis acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. © 2010 by George M. Constantinides, Michal Czerwonko, Jens Carsten Jackwerth, and Stylianos Perrakis. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
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Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence George M. Constantinides, Michal Czerwonko, Jens Carsten Jackwerth, and Stylianos Perrakis NBER Working Paper No. 16302 August 2010 JEL No. D53,G11,G13 ABSTRACT American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out of sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk averse investor holding the market DQG FDVK QHW RI WUDQVDFWLRQ FRVWV DQG ELG DVN VSUHDGV 7KH UHVXOWV DUH HFRQRPLFDOO\ VLJQLILFDQW and robust. George M. Constantinides The University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 and NBER [email protected] Michal Czerwonko McGill University [email protected] Jens Carsten Jackwerth University of Konstanz Universitaetsstrasse 10 78464 Konstanz Germany [email protected] Stylianos Perrakis Department of Finance Concordia University 1455 de Maisonneuve Bvd. West.
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This note was uploaded on 10/26/2010 for the course JOHNSON 6730 taught by Professor Georgegao during the Fall '10 term at Cornell.

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Options on Index Futures Profitable for Risk Averse Investors - Empirical Evidence

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