Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284296 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. 946
Publisher: 
Queen Mary University of London, School of Economics and Finance, London
Abstract: 
We document that a theoretically founded, real-time, and easy-to-implement option-based measure, termed synthetic-stock difference (SSD), accurately estimates the part of stock's expected return arising from stock's transaction costs. We calculate SSD for U.S. optionable stocks. SSD can be more than 10% per annum, it can fluctuate significantly over time and its cross-sectional dispersion widens over market crises periods. We confirm the accuracy of SSD by empirically verifying the predictions of a general asset pricing setting with transaction costs. First, we document its predicted type of connection with various proxies of stocks' transaction costs. Second, we conduct simple asset pricing tests which render fur- ther support. Our setting allows explaining the size of alphas reported by previous literature on the predictive ability of deviations from put-call parity.
Subjects: 
Transaction costs
Put-call parity
Return predictability
Informational content of options
JEL: 
C13
G10
G12
G13
Document Type: 
Working Paper

Files in This Item:
File
Size
763.84 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.