Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

Joseph K.W. Fung; Henry M.K. Mok; Kenneth C.K. Wong

doi:10.1111/j.0732-8516.2004.00083.x

Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

Joseph K.W. Fung, Henry M.K. Mok, Kenneth C.K. Wong

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

9 Citations (Scopus)

Abstract

Using a box spread arbitrage strategy, we examine the pricing efficiency of the emerging, thinly traded Hang Seng Index options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick-by-tick bid-ask and transaction quotes we find very few arbitrage opportunities. Our examination of the reporting time of quotes shows that in effect, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities supports the pricing rationality hypothesis in the Hong Kong options market.

Original language	English
Pages (from-to)	435-454
Number of pages	20
Journal	Financial Review
Volume	39
Issue number	3
DOIs	https://doi.org/10.1111/j.0732-8516.2004.00083.x
Publication status	Published - Aug 2004
Externally published	Yes

Keywords

Bid-ask quotes
Box spread
Limits to arbitrage
Market makers
Price rationality
Thin market

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10.1111/j.0732-8516.2004.00083.x

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AB - Using a box spread arbitrage strategy, we examine the pricing efficiency of the emerging, thinly traded Hang Seng Index options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick-by-tick bid-ask and transaction quotes we find very few arbitrage opportunities. Our examination of the reporting time of quotes shows that in effect, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities supports the pricing rationality hypothesis in the Hong Kong options market.

KW - Bid-ask quotes

KW - Box spread

KW - Limits to arbitrage

KW - Market makers

KW - Price rationality

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Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

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Keywords

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