Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311832 
Year of Publication: 
2025
Series/Report no.: 
CFR Working Paper No. 25-01
Publisher: 
University of Cologne, Centre for Financial Research (CFR), Cologne
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.
Subjects: 
Equity options
Option factor models
Asset pricing
Bayesian model averaging
JEL: 
G12
G14
C11
C12
C52
C53
Document Type: 
Working Paper

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