Index options-futures arbitrage: A comparative study with bid/ask and transaction data

Joseph K.W. Fung; Henry M.K. Mok

doi:10.1111/j.1540-6288.2001.tb00005.x

Index options-futures arbitrage: A comparative study with bid/ask and transaction data

Joseph K.W. Fung, Henry M.K. Mok

Research output: Contribution to journal › Article › peer-review

17 Citations (Scopus)

Abstract

We can infer from bid/ask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bid/ask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bid/ask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.

Original language	English
Pages (from-to)	71-94
Number of pages	24
Journal	Financial Review
Volume	36
Issue number	1
DOIs	https://doi.org/10.1111/j.1540-6288.2001.tb00005.x
Publication status	Published - Feb 2001
Externally published	Yes

Keywords

Bid/ask quotes
Efficiency
Market-making
Options-futures-parity
Transaction data

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10.1111/j.1540-6288.2001.tb00005.x

Cite this

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abstract = "We can infer from bid/ask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bid/ask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bid/ask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.",

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N2 - We can infer from bid/ask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bid/ask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bid/ask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.

AB - We can infer from bid/ask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bid/ask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bid/ask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.

KW - Bid/ask quotes

KW - Efficiency

KW - Market-making

KW - Options-futures-parity

KW - Transaction data

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ER -

Index options-futures arbitrage: A comparative study with bid/ask and transaction data

Abstract

Keywords

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