Efficiency of the foreign currency options market
AbstractThis 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Global Finance Journal.
Volume (Year): 19 (2008)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/620162
Foreign currency options Lower boundary conditions Put-call parity Conditional variance Transaction costs;
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