Arbitrage tests of the efficiency of the foreign currency options market (original) (raw)

1 Efficiency of the Foreign Currency Options Market * by

2009

This paper provides a new test of the efficiency of the currency option markets for four major currencies – British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no arbitrage condition of put-call parity (PCP) holds in a trading environment. Augmented Dickey-Fuller and PhilipsPerron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.

Efficiency of the foreign currency options market

Global Finance Journal, 2008

This paper provides a new test of the efficiency of the currency option markets for four major currencies-British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no arbitrage condition of put-call parity (PCP) holds in a trading environment. Augmented Dickey-Fuller and Philips-Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.

Empirical test of the currency option pricing model

2005

This paper analyze the theoretical value of American and European-style call (GBP call against MYR) on an underlying asset with amount of 1 units of sterling (GBP). Besides that, the marginal effects of the six variables are testing for its contributions on American-style call premium. Binomial Option Pricing model, of Cox, Ross, and Rubinstein (1979), are applied to measure both style of currency options. We find that the call premiums of American option tend to have higher value compare with the European option. In addition, the spot exchange rate, domestic interest rate, time to maturity and volatility have proven of its positive relationship to the American call premium.

Efficiency Tests of the French Index (CAC 40) Options Market

SSRN Electronic Journal, 2000

This paper examines the efficiency of the French options market (MONEP) using transaction data on CAC 40 index options during the period January 02, 1997 through December 30, 1999. In terms of contract volume, CAC 40 options are the most heavily traded index options in the world. We test several no arbitrage conditions (lower boundary, put-call parity, box spread, call spread, put spread, call convexity and put convexity) taking transaction costs and short sale constraints into account. Overall, our results support efficiency of the MONEP as the frequency of arbitrage condition violation is low. However, the size of the profit potential for low cost institutional traders in some strategies is a concern. While the shift to the Euro and the associated changes in the option contract specification improved volume, we do not find any clear evidence of enhanced efficiency. There is some evidence that arbitrage condition violations coincide with brisk trading and exhibit systematic patterns opposite to those found in the US.

Put-call parity, transactions costs and PHLX currency options: intra-daily tests

2010

This paper tests the impact of transactions cost specification on deviations from lower boundary and put-call parity properties. Using PHLX traded foreign exchange options, prices for puts and calls are matched to the nearest five minutes. The results indicate how boundaries on the arbitrage profit function determined by alternative measures of transactions costs can impact the interpretation of deviations from distribution free properties of options such as put-call parity.

The no-arbitrage efficiency test of the OMX Index option market

2012

In this paper, we test the market efficiency of the OMXS30 Index option market. The market efficiency definition is the absence of arbitrage opportunity in the market. We first check the arbitrage opportunity by examining the boundary conditions and the Put-Call-Parity that must be satisfied in the market. Then a variance based efficiency test is performed by establishing a risk neutral portfolio and re-balance the initial portfolio in different trading strategies. In order to choose the most appropriate model for option price and hedging strategies, we calibrate several most applied models, i.e. the BS, Merton, Heston, Bates model and Affine Jump Diffusion models. Our results indicate that the AJD model significantly outperforms other models in the option price forecast and the trading strategies. The boundary and the PCP test and the dynamic hedging strategy results evidence that no significant abnormal returns can be obtained in the OMXS30 option market, therefore supporting the ...

Are options redundant? Further evidence from currency futures markets

International Review of Financial Analysis, 2006

This paper investigates the impact of the introduction of options on the underlying asset's price formation process, using Geweke feedback measures. We derive the feedback measures from the Deutsche Mark, British Pound, Swiss Franc, Japanese Yen and Canadian Dollar futures and spot prices, before and after the introduction of options for these currency futures. While each currency market maintains some distinct characteristics in the post-option period, a common theme is found: after the option introduction, the instantaneous feedback between spot and futures markets improves drastically. The feedback from the spot to the futures market tends to decrease and remains small. The feedback from the futures market to the spot market tends to decrease as well. These results confirm the dominance of options markets, probably due to their smaller transaction costs. When made available, options assume a leading role for information transmission in currency markets.

An Empirical Test of Efficiency of Exchange-Traded Currency Options in India

Business and Economics Research Journal, 2015

The objective of this paper is to examine efficiency of the exchange-traded currency options market in India. Put-call-futures parity for the USD-INR currency options is studied by analyzing daily closing prices of options and futures for thirty two months on the National Stock Exchange. The study reveals frequent violations of the put-call-futures parity creating significant arbitrage opportunities. The pattern of mispricing varies when examined for time to maturity, option moneyness, liquidity and volatility of the underlying asset. These observations are consistent with those of studies of other young markets.