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Research Seminar: Tail Risk, Almost Stochastic Dominance and Index Option Anomalies

Research Seminar: Tail Risk, Almost Stochastic Dominance and Index Option Anomalies

Nazarbayev University Graduate School of Business invites you to the Research Seminar titled “Tail Risk, Almost Stochastic Dominance and Index Option Anomalies”, presented by Dr. Michal Czerwonko


We use a novel definition of tail risk for option pricing purposes, based on the concept of almost stochastic dominance (ASD) in order to examine empirical “puzzles” documented in several high profile studies of the market for S&P 500 index options. We find that with one exception these studies have used a frictionless theoretical framework and modified the observed data to make it fit into it. Thus, they have ignored persistent features of the index option market data such as the wide bid-ask spreads for OTM options, the partial segmentation of the market for puts and calls, and the inconsistency of the results for different maturity options, which we document in our data. We concentrate on the claims that out-of-the money (OTM) put options and at-the-money (ATM) straddles are overpriced. We present simple theoretical models based on ASD of the end user option trader that incorporate these features and are parsimonious in terms of other assumptions. The empirical study makes use of new methods of inference for almost stochastic dominance. It finds that these puzzles disappear under such conditions and concludes that these apparent anomalies are probably due to the omission of the above features

Time: 6 pm - 7 pm
Area: Finance


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Wednesday, March 31, 2021






Michal Czerwonko

Postdoctoral Scholar

Michal Czerwonko received his PhD in Business Administration with a concentration in Finance from Concordia University. In his doctoral program Dr. Czerwonko spent a year at the University of Chicago as a visiting PhD scholar. Dr. Czerwonko also holds an MS degree in Finance with the best graduate master’s thesis in Business Administration award and a BA degree with distinction from Concordia University. Dr. Czerwonko’s interests are in options markets under transactions costs, in empirical asset pricing, and portfolio selection under transactions costs. Experience in the investment industry includes a consulting position at a startup hedge fund. Dr. Czerwonko’s teaching interests include courses in Finance, Econometrics, and Statistics.