Date of Award

1995

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance (Business Administration)

First Advisor

Gary C. Sanger

Abstract

This dissertation examines the valuation of index options. The first chapter analyzes the value of early exercise for an index option, specifically the Standard and Poor's 100 Index (OEX) option. The value is found by estimating European put-call parity and comparing it to the price difference between an American call and put. Zivney (1991) estimated this value for closing prices. The value of early exercise is re-estimated by using bid-ask prices, effectively mitigating the non-synchronous data problem, which may be severe in Zivney's study. The results from using intraday bid-ask prices are compared to last bid-ask and transaction prices. The value of early exercise is added to the Black-Scholes European option model value, and the combination is found to price index options better. The average estimate of early exercise is about 4.1 percent for calls in-the-money and 10.87 percent for puts in-the-money. The second chapter of the dissertation looks at various index proxies. This analysis seeks to discern how arbitragers are capturing arbitrage profits and thereby keeping the options near some equilibrium price. The index is proxied with other index options, the Standard and Poor's 500 Index futures, and small mimicking portfolios of stocks. Arbitrage profits are examined. The benchmark prices are generated with the Black-Scholes option pricing model, the Black-Scholes model plus the value of early exercise found above, the binomial option pricing model, and put-call parity. The mimicking portfolios of stocks produce the poorest profits. This is due to the deviation between the portfolio and the actual index increasing with time. The final section examines price discovery. Using a technique relying on vector error correction models moving averages, it is found that most price discovery is found in the cash OEX index, with a smaller portion occurring in the SPX futures. Virtually no price discovery is found in other options.

Pages

105

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