Many studies find that traditional option pricing models fail to work in practice. The implied volatility smile is one example. In this study, we examine deviations of spot prices from prices implied by put-call parity for Korean KOSPI 200 index options, one of the most actively traded derivative products in the world. Deviations are significant and economically meaningful across different moneyness categories spanning deep-in-the-money to deep-out-of-the-money options. Determinants of put-call disparities for the KOSPI 200 index options include past spot return moments, cognitive biases, and prior option trading volume relative to spot trading volume. We show mispricing is more likely to occur after periods of extreme downturns in the stock market, implying demand for put options increases relative to call options when investors become more likely to insure against extreme loss. We also show that put-call disparity rates have predictive power for future spot returns due to overreaction of KOSPI 200 index option traders, rather than to information contained in option prices.
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Taylor and Francis Ltd.
- Date submitted
20 July 2022
- Additional information
Dr. Jimmy Lockwood serves as assistant professor of finance in the Mike Cottrell College of Business at the University or North Georgia. He his an active member of the Financial Management Association, Southern Finance Association and the Southwestern Finance Association.
Book or Journal Information:
Journal of Behavioral Finance