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Dynamic Equilibrium with Overpriced Put Options
Author(s) -
Isaenko Sergey
Publication year - 2007
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.1468-0300.2007.00177.x
Subject(s) - economics , simple (philosophy) , anomaly (physics) , trading strategy , general equilibrium theory , monetary economics , financial economics , microeconomics , philosophy , physics , epistemology , condensed matter physics
It is a well‐known anomaly that prices of put options are too high when options are out‐of‐the‐money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out‐of‐the‐money. Overpricing is due to the presence of short‐sale constraints on trading stocks and derivatives, as well as the heterogeneity between investors. We confirm the predicting power of the model by comparing its implications with existing empirical results.