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Valuation of American Futures Options: Theory and Empirical Tests
Author(s) -
WHALEY ROBERT E.
Publication year - 1986
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1986.tb04495.x
Subject(s) - futures contract , valuation (finance) , economics , valuation of options , expiration , equity (law) , financial economics , expiration date , put option , transaction cost , actuarial science , call option , econometrics , microeconomics , finance , medicine , chemistry , food science , political science , law , respiratory system
This paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the S&P 500 equity futures option market. The American futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in‐the‐money and to the option's time to expiration. The models are also shown to generate abnormal risk‐adjusted rates of return after transaction costs. The joint hypothesis that the American futures option pricing models are correctly specified and that the S&P 500 futures option market is efficient is refuted, at least for the sample period January 28, 1983 through December 30, 1983.