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 journalJournal articlepeer-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 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

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