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

Joseph K W FUNG, Henry M.K. Mok*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 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 languageEnglish
Pages (from-to)71-94
Number of pages24
JournalFinancial Review
Volume36
Issue number1
DOIs
Publication statusPublished - Feb 2001

Scopus Subject Areas

  • Finance
  • Economics and Econometrics

User-Defined Keywords

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

Fingerprint

Dive into the research topics of 'Index options-futures arbitrage: A comparative study with bid/ask and transaction data'. Together they form a unique fingerprint.

Cite this