Explaining S&P500 option returns: an implied risk-adjusted approach

The option mispricing puzzle states that realized option returns are inconsistent with option pricing models in perfect markets. This paper applies the approach by Brinkmann and Korn (Rev Deriv Res 21:149–173, 2018) to forecast S&P500 option returns via option-implied expectations of a risk-averse representative investor. The approach is able to explain S&P500 put option returns and achieves superior prediction results over standard option pricing models. However, none of the tested option pricing models can explain the highly negative mean realized S&P500 out-of-the-money call option returns due to the empirically U-shaped pricing kernel.