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An empirical investigation of UK option returns: overpricing and the role of higher systematic moments

Research output: Working paper

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An empirical investigation of UK option returns: overpricing and the role of higher systematic moments. / Shackleton, M B; O'Brien, F.

Lancaster University : The Department of Accounting and Finance, 2004. (Accounting and Finance Working Paper Series).

Research output: Working paper

Harvard

Shackleton, MB & O'Brien, F 2004 'An empirical investigation of UK option returns: overpricing and the role of higher systematic moments' Accounting and Finance Working Paper Series, The Department of Accounting and Finance, Lancaster University.

APA

Shackleton, M. B., & O'Brien, F. (2004). An empirical investigation of UK option returns: overpricing and the role of higher systematic moments. (Accounting and Finance Working Paper Series). The Department of Accounting and Finance.

Vancouver

Shackleton MB, O'Brien F. An empirical investigation of UK option returns: overpricing and the role of higher systematic moments. Lancaster University: The Department of Accounting and Finance. 2004. (Accounting and Finance Working Paper Series).

Author

Shackleton, M B ; O'Brien, F. / An empirical investigation of UK option returns: overpricing and the role of higher systematic moments. Lancaster University : The Department of Accounting and Finance, 2004. (Accounting and Finance Working Paper Series).

Bibtex

@techreport{0a5cbb09910a42f387603e2450ff0d43,
title = "An empirical investigation of UK option returns: overpricing and the role of higher systematic moments",
abstract = "The Capital Asset Pricing Model (CAPM) assumes either that all asset returns are normally distributed or that investors have mean-variance preferences. Given empirical observations of asset returns, which document evidence of skewness and kurtosis, both assumptions are suspect. While several studies have investigated incorporating higher moments into asset pricing models using equity data, literature on the contribution of the third and fourth moments in explaining the return-generating process in options markets is sparse. Using a two-pass methodology we investigate an asset pricing model that allows moments of higher order than two using Europeanstyle exercise (ESX) equity index option data from the London International Financial Futures and Options Exchange (LIFFE). Our empirical investigation shows that ESX option contracts appear to be overpriced and that on average almost all puts and calls earn negative daily returns during our ten-year sample period. Furthermore, our regression results show that systematic variance has a significant role in explaining the cross-section of option returns and that the role of systematic skewness and systematic kurtosis throughout the sample period is less clear.",
keywords = "option returns, CAPM, systematic, skewness, kurtosis, comoments, cross-section",
author = "Shackleton, {M B} and F O'Brien",
year = "2004",
language = "English",
series = "Accounting and Finance Working Paper Series",
publisher = "The Department of Accounting and Finance",
type = "WorkingPaper",
institution = "The Department of Accounting and Finance",

}

RIS

TY - UNPB

T1 - An empirical investigation of UK option returns: overpricing and the role of higher systematic moments

AU - Shackleton, M B

AU - O'Brien, F

PY - 2004

Y1 - 2004

N2 - The Capital Asset Pricing Model (CAPM) assumes either that all asset returns are normally distributed or that investors have mean-variance preferences. Given empirical observations of asset returns, which document evidence of skewness and kurtosis, both assumptions are suspect. While several studies have investigated incorporating higher moments into asset pricing models using equity data, literature on the contribution of the third and fourth moments in explaining the return-generating process in options markets is sparse. Using a two-pass methodology we investigate an asset pricing model that allows moments of higher order than two using Europeanstyle exercise (ESX) equity index option data from the London International Financial Futures and Options Exchange (LIFFE). Our empirical investigation shows that ESX option contracts appear to be overpriced and that on average almost all puts and calls earn negative daily returns during our ten-year sample period. Furthermore, our regression results show that systematic variance has a significant role in explaining the cross-section of option returns and that the role of systematic skewness and systematic kurtosis throughout the sample period is less clear.

AB - The Capital Asset Pricing Model (CAPM) assumes either that all asset returns are normally distributed or that investors have mean-variance preferences. Given empirical observations of asset returns, which document evidence of skewness and kurtosis, both assumptions are suspect. While several studies have investigated incorporating higher moments into asset pricing models using equity data, literature on the contribution of the third and fourth moments in explaining the return-generating process in options markets is sparse. Using a two-pass methodology we investigate an asset pricing model that allows moments of higher order than two using Europeanstyle exercise (ESX) equity index option data from the London International Financial Futures and Options Exchange (LIFFE). Our empirical investigation shows that ESX option contracts appear to be overpriced and that on average almost all puts and calls earn negative daily returns during our ten-year sample period. Furthermore, our regression results show that systematic variance has a significant role in explaining the cross-section of option returns and that the role of systematic skewness and systematic kurtosis throughout the sample period is less clear.

KW - option returns

KW - CAPM

KW - systematic

KW - skewness

KW - kurtosis

KW - comoments

KW - cross-section

M3 - Working paper

T3 - Accounting and Finance Working Paper Series

BT - An empirical investigation of UK option returns: overpricing and the role of higher systematic moments

PB - The Department of Accounting and Finance

CY - Lancaster University

ER -