A Bayesian Stochastic Discount Factor for the Cross-Section of Individual Equity Options
Journal
Journal of Financial and Quantitative Analysis
Type
journal article
Date Issued
2025-10-06
Author(s)
Abstract
We utilize Bayesian model averaging to estimate a stochastic discount factor (SDF) for single-stock options. A Bayesian model averaging SDF outperforms reduced-form benchmark models in-sample and out-of-sample in pricing option return anomalies and portfolios. We document that the SDF is dense in characteristics with the impliedrealized volatility spread, option return momentum, and jump risk emerging as the most likely included factors. Noteworthy, we find that (i) our results remain largely robust after controlling for transaction costs and (ii) characteristics linked to behavioral biases gain in importance for options with high retail trading volume.
Language
English
Keywords
JEL classification: G12, G14, C11, C12, C52, C53 Equity options
Option factor models
Asset pricing
Bayesian model averaging JEL classification: G12, G14, C11, C12, C52, C53 Options
Option factor model
Asset pricing
Bayesian model averaging
Refereed
yes
Subject(s)
File(s)![Thumbnail Image]()
Name
KMWW_Bayesian_Option_SDF.pdf
Size
1.31 MB
Format
Adobe PDF
Checksum (MD5)
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