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Constantinides, G.M., Czerwonko, M., Jackwerth, J.C. and Perrakis, S. (2011) Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence. Journal of Finance, 66, 1407-1437.
https://doi.org/10.1111/j.1540-6261.2011.01665.x

has been cited by the following article:

  • TITLE: A Simple Model to Explain Expensive Index Call Options

    AUTHORS: Sang Baum Kang

    KEYWORDS: Heterogeneity in Beliefs, Stochastic Dominance Upper Bound, Index Option, Call Option, Representative Agent

    JOURNAL NAME: Theoretical Economics Letters, Vol.7 No.3, March 16, 2017

    ABSTRACT: According to the empirical finance literature, S&P 500 Index call options frequently violate the stochastic dominance upper bounds. In other words, index call options in the US are frequently overpriced. I propose a theoretical model to explain the reason for this. A simple economic model in this article reveals that when agents are sufficiently heterogeneous, a call option may be overpriced from the perspective of the representative agent. The key economic intuitions can be summarized as follows: First, if agents are sufficiently heterogeneous, a bullish agent, who is hungry for the “exposure” to a stock, may buy an expensive call option from a constrained bearish agent. Second, even though a call option is fairly priced from the perspectives of heterogeneous market participants, it may be overpriced from the perspective of the representative agent. Assuming reasonable parameters of heterogeneity, I find that a call option price violates the representative agent’s stochastic dominance upper bound.