Overreactions in the Options Market

  • Author(s): JEREMY STEIN
  • Published: Apr 30, 2012
  • Pages: 1011-1023
  • DOI: 10.1111/j.1540-6261.1989.tb02635.x


This paper examines the “term structure” of options' implied volatilities, using data on S&P 100 index options. Because implied volatility is strongly mean reverting, the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option. Empirically, this elasticity turns out to be larger than suggested by rational expectations theory—long‐maturity options tend to “overreact” to changes in the implied volatility of short‐maturity options.

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