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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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Related research

Keywords: Limits to arbitrage; liquidity; survival analysis; index options; ETFs;

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References

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  1. Tuckman, Bruce & Vila, Jean-Luc, 1992. " Arbitrage with Holding Costs: A Utility-Based Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1283-302, September.
  2. Kyle, Albert & Campbell, John, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Scholarly Articles 3208217, Harvard University Department of Economics.
  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 _124, University of California at Berkeley, Economics Department.
  4. Finucane, Thomas J., 1991. "Put-Call Parity and Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 445-457, December.
  5. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
  6. Lucy F. Ackert & Yisong S. Tian, 1999. "Efficiency in index options markets and trading in stock baskets," Working Paper 99-5, Federal Reserve Bank of Atlanta.
  7. Ofek, Eli & Richardson, Matthew & Whitelaw, Robert F., 2004. "Limited arbitrage and short sales restrictions: evidence from the options markets," Journal of Financial Economics, Elsevier, vol. 74(2), pages 305-342, November.
  8. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
  9. Billingsley, Randall S & Chance, Don M, 1985. "Options Market Efficiency and the Box Spread Strategy," The Financial Review, Eastern Finance Association, vol. 20(4), pages 287-301, November.
  10. Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-56, July.
  11. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
  12. Klemkosky, Robert C & Resnick, Bruce G, 1979. "Put-Call Parity and Market Efficiency," Journal of Finance, American Finance Association, vol. 34(5), pages 1141-55, December.
  13. Gould, J. P. & Galai, D., 1974. "Transactions costs and the relationship between put and call prices," Journal of Financial Economics, Elsevier, vol. 1(2), pages 105-129, July.
  14. Stoll, Hans R, 1969. "The Relationship between Put and Call Option Prices," Journal of Finance, American Finance Association, vol. 24(5), pages 801-24, December.
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Cited by:
  1. 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.
  2. Anna Calamia & Laurent Deville & Fabrice Riva, 2013. "Liquidity in European Equity ETFs: What Really Matters?," GREDEG Working Papers 2013-10, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.

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