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Efficiency of the foreign currency options market

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Author Info

  • Hoque, Ariful
  • Chan, Felix
  • Manzur, Meher

Abstract

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.

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File URL: http://www.sciencedirect.com/science/article/B6W4F-4SMWFF8-1/2/082334be85fedc549f59c47e58119043
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Bibliographic Info

Article provided by Elsevier in its journal Global Finance Journal.

Volume (Year): 19 (2008)
Issue (Month): 2 ()
Pages: 157-170

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Handle: RePEc:eee:glofin:v:19:y:2008:i:2:p:157-170

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Web page: http://www.elsevier.com/locate/inca/620162

Related research

Keywords: Foreign currency options Lower boundary conditions Put-call parity Conditional variance Transaction costs;

References

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  1. Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-56, July.
  2. Ghosh, Dilip K. & Ghosh, Dipasri, 2005. "Covered arbitrage with currency options: A theoretical analysis," Global Finance Journal, Elsevier, vol. 16(1), pages 86-98, August.
  3. Bhattacharya, Mihir, 1983. "Transactions data tests of efficiency of the Chicago board options exchange," Journal of Financial Economics, Elsevier, vol. 12(2), pages 161-185, August.
  4. Stoll, Hans R, 1969. "The Relationship between Put and Call Option Prices," Journal of Finance, American Finance Association, vol. 24(5), pages 801-24, December.
  5. Muller, Ulrich A. & Dacorogna, Michel M. & Olsen, Richard B. & Pictet, Olivier V. & Schwarz, Matthias & Morgenegg, Claude, 1990. "Statistical study of foreign exchange rates, empirical evidence of a price change scaling law, and intraday analysis," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1189-1208, December.
  6. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  7. Gould, J. P. & Galai, D., 1974. "Transactions costs and the relationship between put and call prices," Journal of Financial Economics, Elsevier, vol. 1(2), pages 105-129, July.
  8. Galai, Dan, 1978. "Empirical tests of boundary conditions for CBOE options," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 187-211.
  9. Bodurtha, James N, Jr & Courtadon, Georges R, 1986. " Efficiency Tests of the Foreign Currency Options Market," Journal of Finance, American Finance Association, vol. 41(1), pages 151-62, March.
  10. Halpern, Paul J & Turnbull, Stuart M, 1985. " Empirical Tests of Boundary Conditions for Toronto Stock Exchange Options," Journal of Finance, American Finance Association, vol. 40(2), pages 481-500, June.
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Citations

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Cited by:
  1. Ariful Hoque & Chandrasekhar Krishnamurti, 2012. "Modeling moneyness volatility in measuring exchange rate volatility," International Journal of Managerial Finance, Emerald Group Publishing, vol. 8(4), pages 365-380.
  2. Krishnamurti, Chandrasekhar & Hoque, Ariful, 2011. "Efficiency of European emissions markets: Lessons and implications," Energy Policy, Elsevier, vol. 39(10), pages 6575-6582, October.

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