Early exercise of American put options: Investor rationality on the Swedish equity options market

Citation
M. Engstrom et al., Early exercise of American put options: Investor rationality on the Swedish equity options market, J FUT MARK, 20(2), 2000, pp. 167-188
Citations number
20
Language
INGLESE
art.tipo
Article
Categorie Soggetti
Economics
Journal title
JOURNAL OF FUTURES MARKETS
ISSN journal
0270-7314 → ACNP
Volume
20
Issue
2
Year of publication
2000
Pages
167 - 188
Database
ISI
SICI code
0270-7314(200002)20:2<167:EEOAPO>2.0.ZU;2-V
Abstract
Using Swedish equity option data, this study investigates how well the actu al exercise behavior of American put options corresponds to the early exerc ise rules, The optimal exercise strategy is established in two ways, First, the critical exercise price, above which a put option should be exercised early, is computed and compared to the actual exercise price. Second, the e xercise value of the option is compared to its market bid price, The result s show that most early exercise decisions conform to rational exercise beha vior, even though a large number of failures to exercise are found. Most of the faulty exercises can also be discarded after a sensitivity analysis, a lthough several failures to exercise are considered irrational, even after taking transaction costs into account. (C) 2000 John Wiley & Sons, Inc.