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Non-simultaneity and Apparent Option Mispricing in Tests of Put-Call Parity

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  • Stephen A. Easton

    (Department of Accounting and Finance, Monash University, Clayton VIC 3168.)

Abstract

Transaction costs have been offered as the most likely explanation for apparent mispricing found in recent studies of the Australian options market. This paper suggests that another feature of the market, namely non-simultaneity between option prices and the price of the underlying share, offers a more powerful explanation. It is demonstrated that the types of violations of put-call parity that have been observed in Australia are the types of violations that are to be expected when non-simultaneity is present. It is shown that apparent mispricing in tests of put-call parity will, in the presence of non-simultaneity, be greater for short-term options. Conversely, mispricing will be less for options which are at-the-money, and when the risk-free rate of interest is high. Non-simultaneity is likely to result in put options appearing to be undervalued relative to call options and the underlying share.

Suggested Citation

  • Stephen A. Easton, 1994. "Non-simultaneity and Apparent Option Mispricing in Tests of Put-Call Parity," Australian Journal of Management, Australian School of Business, vol. 19(1), pages 47-60, June.
    • Handle: RePEc:sae:ausman:v:19:y:1994:i:1:p:47-60
    DOI: 10.1177/031289629401900103
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    References listed on IDEAS

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    1. Bookstaber, Richard M, 1981. "Observed Option Mispricing and the Nonsimultaneity of Stock and Option Quotations," The Journal of Business, University of Chicago Press, vol. 54(1), pages 141-155, January.
    2. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    3. Vijh, Anand M, 1988. " Potential Biases from Using Only Trade Prices of Related Securities on Different Exchanges: A Comment," Journal of Finance, American Finance Association, vol. 43(4), pages 1049-1055, September.
    4. Jarrell, Gregg A & Brickley, James A & Netter, Jeffry M, 1988. "The Market for Corporate Control: The Empirical Evidence Since 1980," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 49-68, Winter.
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    Cited by:

    1. Robert E.J. Hibbard & Rob Brown & Keith R. McLaren, 2002. "Nonsimultaneity and Futures Option Pricing: Simulation and Empirical Evidence," Monash Econometrics and Business Statistics Working Papers 13/02, Monash University, Department of Econometrics and Business Statistics.

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