Testing the Monotonicity Property of Option Prices
Why this work is in the frame
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Bibliographic record
Abstract
One of the most basic properties of rational option pricing is that a rise in the price of the underlying increases the value of a call and decreases the value of a put. But results reported in the literature have found that for options on the S&P 500 Index this principle is violated in practice on the order of 10 percent of the time. Should we interpret this as evidence that the options market often ignores a fundamental principle of option valuation? Or that new option models are needed that would allow such seemingly anomalous behavior? In this article, Pérignon helps to resolve this issue using transactions-level data from five major index-options markets. He finds that wrong-way option price changes do occur in all of them a substantial fraction of the time. But looking for the explanation behind the numbers, he shows that market microstructure effects, like bid-ask bounce and rational tactics for trading in a market with a wide bid-ask spread, appear to account for much of the phenomenon. <bold>TOPICS:</bold> <ext-link>Options</ext-link>, <ext-link>security analysis and valuation</ext-link>
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Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.001 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from it