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Evidence on the arbitrage efficiency of SPI index futures and options markets

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  • Steven Li
  • Elia Alfay

Abstract

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia. Copyright Springer Science+Business Media, LLC 2006

Suggested Citation

  • Steven Li & Elia Alfay, 2006. "Evidence on the arbitrage efficiency of SPI index futures and options markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(1), pages 71-93, March.
    • Handle: RePEc:kap:apfinm:v:13:y:2006:i:1:p:71-93
    DOI: 10.1007/s10690-007-9035-z
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    References listed on IDEAS

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    1. Fung, Joseph K W & Mok, Henry M K, 2001. "Index Options-Futures Arbitrage: A Comparative Study with Bid/Ask and Transaction Data," The Financial Review, Eastern Finance Association, vol. 36(1), pages 71-94, February.
    2. Michael J. Aitken & Alex Frino & Amelia M. Hill & Elvis Jarnecic, 2004. "The impact of electronic trading on bid‐ask spreads: Evidence from futures markets in Hong Kong, London, and Sydney," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(7), pages 675-696, July.
    3. Christine A. Brown, 1999. "The Volatility Structure Implied by Options on the SPI Futures Contract," Australian Journal of Management, Australian School of Business, vol. 24(2), pages 115-130, December.
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    5. Klemkosky, Robert C. & Resnick, Bruce G., 1980. "An ex ante analysis of put-call parity," Journal of Financial Economics, Elsevier, vol. 8(4), pages 363-378, December.
    6. Brown, C. A. & Taylor, S. D., 1997. "A test of the Asay model for pricing options on the SPI futures contract," Pacific-Basin Finance Journal, Elsevier, vol. 5(5), pages 579-594, December.
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    More about this item

    Keywords

    Put-call-futures parity; Market efficiency; SPI index; Futures; Options; G13; G14;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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