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Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market

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  • Chin‐Ho Chen
  • Huimin Chung
  • Shu‐Fang Yuan

Abstract

This study examines whether deviations from put–call parity are informative about future volatility in the underlying index. Using the difference in implied volatility between call and put options to measure these deviations, we find that deviations from put–call parity predict future volatility. The predictability becomes stronger as option liquidity increases and the liquidity of the underlying index decreases. The results for volatility prediction remain significant even after controlling for implied volatility, information shocks, other information variables on return and volatility used widely in the literature, and short sales constraints. In addition, our results also show that deviations from put–call parity contain information about the future trading volume of options and the underlying index. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:1122–1145, 2014

Suggested Citation

  • Chin‐Ho Chen & Huimin Chung & Shu‐Fang Yuan, 2014. "Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(12), pages 1122-1145, December.
    • Handle: RePEc:wly:jfutmk:v:34:y:2014:i:12:p:1122-1145
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    Cited by:

    1. Wang, Xiaolin & Ye, Qiang & Zhao, Feng, 2016. "Trading activity and price behavior in Chinese agricultural futures markets," Finance Research Letters, Elsevier, vol. 18(C), pages 52-59.
    2. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    3. Lin, William T. & Tsai, Shih-Chuan & Zheng, Zhenlong & Qiao, Shuai, 2018. "Retrieving aggregate information from option volume," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 220-232.
    4. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    5. Koutmos, Dimitrios, 2016. "Distilling private information from plain-vanilla options to predict future underlying stock price volatility: Evidence from the H-shares of Chinese banks," Research in International Business and Finance, Elsevier, vol. 37(C), pages 391-405.
    6. Zhang, Huiming & Watada, Junzo, 2019. "An analysis of the arbitrage efficiency of the Chinese SSE 50ETF options market," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 474-489.
    7. Somaiyah Alalmai, 2023. "Derivatives Market: A Survey," International Journal of Economics and Financial Issues, Econjournals, vol. 13(6), pages 101-106, November.
    8. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

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