This paper evaluates the underperformance of individual equity options relative to their replicating portfolios. Considering a high-dimensional set of variables, we use a machine learning approach to identify the characteristics of options and their underlying stocks that provide incremental...

This paper studies the effects of default risk on equity option returns. We show that there is a cross-sectional and a time-series relation between default risk and option returns. In the cross-section, expected delta-hedged equity option returns have a negative relation with default risk...

Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The...

Are options on more volatile assets expected to provide higher or lower return? Using analytics, we show the ambiguous nature of the answer when the volatility differential is due to the systematic/priced risk. Here the difference in the expected return of the assets also matters and has an...

An anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse...

Constantinides et al (2013) put forward a number of empirical findings regarding leverage adjusted S&P 500 index option returns. Their findings are puzzling in the context of the Black-Scholes-Merton Option Pricing Model and the Capital Asset Pricing Model. Experimental evidence as well as the...

I show that the inventory risk faced by market-makers has a first-order effect on option prices. I introduce a simple approach that decomposes the price impact of trades into inventory risk and asymmetric information components. While both components are large for option trades, the inventory...

Little is known about the economic sources that may generate the abnormal returns observed in put index options. We show that the learning process followed by investors may be one such source. We develop an equilibrium model under partial information in which a rational Bayesian learner prices...

We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns...

Little is known about the economic sources that may generate the abnormal returns observed in put index options. We show that the learning process followed by investors may be one such source. We develop an equilibrium model under partial information in which a rational Bayesian learner prices...