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 | |
| Publication status | Published - Feb 2001 |
Scopus Subject Areas
- Finance
- Economics and Econometrics
User-Defined Keywords
- Bid/ask quotes
- Efficiency
- Market-making
- Options-futures-parity
- Transaction data