Do option investors rationally exercise their options? Numerous studies report evidence of irrational behavior. In this paper, we pay careful attention to intraday option quotes and reach the opposite conclusion. An exercise boundary violation (EBV) occurs when the best bid price for an American...

Theory says an American call should never be exercised early, except possibly just before an ex-dividend date. But the best market bid is frequently below intrinsic value for an in-the-money short maturity option. An American option can always be exercised to recover intrinsic value, while...

An exercise boundary violation (EBV) occurs when the current bid price for an American option in the market is below intrinsic value. A seller at this price leaves money on the table and the buyer receives an arbitrage profit. In a liquid market, competition among dealers should drive up the bid...

A risk-neutral probability distribution (RND) for future S&P 500 returns extracted from index options contains investors' true expectations and also their risk preferences. But the empirical pricing kernel that emerges in a representative agent framework, which suppresses investor differences,...

Derivatives valuation has strong theoretical support because models are derived from the principle that arbitrage between the derivative and its underlying will eliminate riskless profits and drive the market price to the model value. "No-arbitrage" is invoked routinely whenever a new pricing...

Implied volatility (IV) reflects both expected empirical volatility and also risk premia. Stochastic variation in either creates unhedged risk in a delta hedged options position. We develop EGARCH/DCC models for the dynamics of volatilities and correlations among daily IVs from options on 28...