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Dividends and S&P 100 Index Option Valuation

Journal of Futures Markets, 12 (1992): 123-137

Campbell R. Harvey

Duke University, Durham, NC 27708, USA

Robert E. Whaley

Duke University, Durham, NC 27708, USA


It is commonplace in research and practice to see S&P 100 index options valued using European-style formulas or American-style approximation methods that assume the index pays dividends at a constant proportional rate. Day and Lewis (1988, in press), Franks and Schwartz (1988), and Schwert (1990), for example, use a dividend-adjusted, European-style approximation to estimate market volatilities from S&P 100 index option prices. Sheikh (1989) uses the European-style model in transaction tests of S&P 100 call options. Stein (1989), on the other hand, relies on an American-style binomial method that assumes a constant proportional dividend yield on the index.