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The Determinants of the Time to Efficiency in Options Markets: A Survival Analysis Approach

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  • Deville, Laurent
  • Riva, Fabrice

Abstract

This paper examines the determinants of the time it takes for an index options market to be brought back to efficiency after put-call parity deviations, using intraday transactions data from the French CAC 40 index options over the August 2000 - July 2001 period. We address this issue through survival analysis which allows us to characterize how differences in market conditions influence the expected time before the market reaches the no-arbitrage relationship. We find that moneyness, maturity, trading volume as well as trade imbalances in call and put options, and volatility are important in understanding why some arbitrage opportunities disappear faster than others. After controlling for differences in the trading environnement, we find evidence of a negative relationship between the existence of ETFs on the index and the time to efficiency.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/2200.

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Date of creation: Dec 2004
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Handle: RePEc:dau:papers:123456789/2200

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Keywords: Survival analysis; Market efficiency; Survival analysis; exchange traded funds; Index options;

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  1. Lo, Andrew W. & MacKinlay, A. Craig & Zhang, June, 2002. "Econometric models of limit-order executions," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(1), pages 31-71, July.
  2. Gould, J. P. & Galai, D., 1974. "Transactions costs and the relationship between put and call prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 1(2), pages 105-129, July.
  3. Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 743-56, July.
  4. Finucane, Thomas J., 1991. "Put-Call Parity and Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(04), pages 445-457, December.
  5. Kamara, Avraham & Miller, Thomas W., 1995. "Daily and Intradaily Tests of European Put-Call Parity," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 30(04), pages 519-539, December.
  6. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 53(1), pages 61-65, January.
  7. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  8. Stoll, Hans R, 1969. "The Relationship between Put and Call Option Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 24(5), pages 801-24, December.
  9. Merton, Robert C, 1973. "The Relationship Between Put and Call Option Prices: Comment," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 183-84, March.
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Cited by:
  1. Fran├žois-Heude, Alain & Yousfi, Ouidad, 2013. "On the liquidity of CAC 40 index options Market," MPRA Paper 47921, University Library of Munich, Germany, revised 01 Jul 2013.

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