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Liquidity and Arbitrage in Options Markets: A SurvivalAnalysis Approach

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Author Info
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)

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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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Paper provided by HAL in its series Post-Print with number halshs-00162221_v1.

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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_v1

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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  2. Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-56, July. [Downloadable!] (restricted)
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  5. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December. [Downloadable!] (restricted)
  6. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360. [Downloadable!] (restricted)
  7. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 1-34, January. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September. [Downloadable!] (restricted)
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  12. 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. [Downloadable!]
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