Semester

Spring

Date of Graduation

2026

Document Type

Dissertation

Degree Type

PhD

College

College of Business and Economics

Department

Finance

Committee Chair

Bingxin Li

Committee Member

Ruiyuan Chen

Committee Member

Alexander Kurov

Committee Member

Sabatino Silveri

Committee Member

Feng Yao

Abstract

This dissertation includes three essays examining index option and stock option markets. The first essay investigates the pricing kernel puzzle by examining S&P 500 index option returns and empirical pricing kernels across expiration dates ranging from one month to one year. We document that at short maturities, out-of-the-money call option returns are negative and decrease with the strike price, while at long maturities, at least some are positive and increase with the strike price. Empirical pricing kernels predominantly exhibit a W-shape at short maturities, with this pattern becoming less pronounced and evolving toward a monotonically decreasing curve at longer maturities. These findings suggest that the shape of pricing kernels and call option returns varies with option maturities, reflecting investors’ heterogeneous beliefs about index returns across different time horizons.

The second essay examines short-maturity S&P 500 index options, which have become increasingly popular over the past decade. We document that short-maturity options exhibit a more pronounced non-zero implied volatility (IV) spread. Although the IV spread does not generally predict future index returns, it negatively predicts subsequent index returns during periods of rising volatility and elevated investor overreaction, with stronger predictive power for short-maturity options. We also find supporting evidence around FOMC announcements. Overall, the results are consistent with a sentiment-driven explanation, suggesting that IV spreads reflect temporary mispricing associated with investor overreaction rather than informed trading.

The third essay investigates stock option trading activity on the first trading day following merger announcements. We find that the bidder’s IV spread is negatively associated with merger success for cash deals and private targets and positively predicts the bidder’s subsequent stock returns before merger resolution. Additionally, the bidder’s option average time to maturity is positively associated with merger time to resolution. Analyses incorporating combined option trading measures for both the bidder and the target yield consistent results. Overall, this essay highlights how stock option trading activity shortly after merger announcements provides insights into both merger outcomes and timing.

Download

Share

COinS