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Liquidity and Arbitrage in Options Markets: A SurvivalAnalysis Approach

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  • Laurent Deville

    ()
    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)

  • Fabrice Riva

    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)

Abstract

This paper examines the determinants of the time it takes for an index options market to return to no arbitrage values after put-call parity deviations, using intraday transactions data from the French index options market. We employ survival analysis to characterize how limits to arbitrage influence the expected duration of arbitrage deviations. After controlling for conventional limits to arbitrage, we show that liquidity-linked variables are associated with a faster reversion of arbitrage profits. The introduction of an ETF also affects the survival rates of deviations but this impact essentially stems from the reduction in the level of potential arbitrage profits.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00162221.

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Date of creation: 2007
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Publication status: Published, Review of Finance / European Finance Review, 2007, 11, 3, 497-525
Handle: RePEc:hal:journl:halshs-00162221

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00162221/en/
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Keywords: Limits to arbitrage; liquidity; survival analysis; index options; ETFs;

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References

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  1. 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.
  2. 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.
  3. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers, University of California at Berkeley, Economics Department _124, University of California at Berkeley, Economics Department.
  4. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2135-2175, December.
  5. Klemkosky, Robert C & Resnick, Bruce G, 1979. "Put-Call Parity and Market Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 34(5), pages 1141-55, December.
  6. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 341-360.
  7. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 1-34, January.
  8. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(9), pages 1607-1634, September.
  9. 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.
  10. Tuckman, Bruce & Vila, Jean-Luc, 1992. " Arbitrage with Holding Costs: A Utility-Based Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1283-302, September.
  11. 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.
  12. Billingsley, Randall S & Chance, Don M, 1985. "Options Market Efficiency and the Box Spread Strategy," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 20(4), pages 287-301, November.
  13. 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.
  14. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 305-342, November.
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Cited by:
  1. Efstathios Panayi & Gareth Peters, 2014. "Survival Models for the Duration of Bid-Ask Spread Deviations," Papers 1406.5487, arXiv.org.
  2. Anna Calamia & Laurent Deville & Fabrice Riva, 2013. "Liquidity in European Equity ETFs: What Really Matters?," GREDEG Working Papers, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis 2013-10, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  3. François-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.
  4. Alain François-Heude & Ouidad Yousfi, 2014. "On the liquidity of CAC 40 index options Market," Working Papers, Department of Research, Ipag Business School 2014-445, Department of Research, Ipag Business School.

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