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 journalJournal articlepeer-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 languageEnglish
    Pages (from-to)435-454
    Number of pages20
    JournalFinancial Review
    Volume39
    Issue number3
    DOIs
    Publication statusPublished - Aug 2004

    Scopus Subject Areas

    • Finance
    • Economics and Econometrics

    User-Defined Keywords

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

    Fingerprint

    Dive into the research topics of 'Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market'. Together they form a unique fingerprint.

    Cite this