Risk arbitrage opportunities for stock index options
Post T. Longarela I.R.
1 January 2021INFORMS Inst.for Operations Res.and the Management Sciences
Operations Research
2021#69Issue 1100 - 113 pp.
To analyze the economic significance of pricing errors of stock index options, a system of linear inequalities is developed that completely characterizes all risk arbitrage opportunities that arise if a well-behaved pricing kernel does not exist. The stochastic arbitrage system can account for market imperfections in the form of transactions costs and general portfolio restrictions. An active trading strategy based on the stochastic arbitrage system for front-month S&P500 stock index options yields significant abnormal returns out of sample for small-scale portfolios. However, outperformance seems elusive if the strategy is scaled up and market depth is taken into account. Copyright:
Linear programming , Options pricing , Options trading , Risk arbitrage , Stochastic dominance
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Graduate School of Business, Nazarbayev University, Astana, 01000, Kazakhstan
Department of Economic Modeling, National Analytical Center ‘Analytica, Astana, 01000, Kazakhstan
Department of Finance, Stockholm Business School, Stockholm University, Stockholm, 106 91, Sweden
Graduate School of Business
Department of Economic Modeling
Department of Finance
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