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- W3205292242 abstract "Due to their short lifespans and migrating moneyness, options are notoriously difficult to study with the factor models commonly used to analyze the risk-return trade-off in other asset classes. Instrumented principal components analysis solves this problem by tracking contracts in terms of their pricing-relevant characteristics via time-varying latent factor loadings. We find that a model with three latent factors prices the cross-section of option returns and explains more than 85% of the variation in a panel of monthly S&P 500 option returns from 1996 to 2017. In particular, we show that the IPCA factors can be rationalized via an economically plausible three-factor model consisting of a level, slope and skew factor. Finally, out-of-sample trading strategies based on insights from the IPCA model have significant alpha over previously studied option strategies." @default.
- W3205292242 created "2021-10-25" @default.
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- W3205292242 date "2021-10-01" @default.
- W3205292242 modified "2023-09-24" @default.
- W3205292242 title "A Factor Model For Option Returns" @default.
- W3205292242 doi "https://doi.org/10.3386/w29369" @default.
- W3205292242 hasPublicationYear "2021" @default.
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