Efficiency of the foreign currency options market
This paper provides a new test of the efficiency of the currency option markets for four major currencies -- British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no-arbitrage condition of put-call parity (PCP) holds in a trading environment. Augmented Dickey-Fuller and Philips-Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Stephen F. Gray, 1989. "Put Call Parity: An Extension of Boundary Conditions," Australian Journal of Management, Australian School of Business, vol. 14(2), pages 151-169, December.
- Ghosh, Dilip K. & Ghosh, Dipasri, 2005. "Covered arbitrage with currency options: A theoretical analysis," Global Finance Journal, Elsevier, vol. 16(1), pages 86-98, August.
- Halpern, Paul J & Turnbull, Stuart M, 1985. " Empirical Tests of Boundary Conditions for Toronto Stock Exchange Options," Journal of Finance, American Finance Association, vol. 40(2), pages 481-500, June.
- Bhattacharya, Mihir, 1983. "Transactions data tests of efficiency of the Chicago board options exchange," Journal of Financial Economics, Elsevier, vol. 12(2), pages 161-185, August.
- Galai, Dan, 1978. "Empirical tests of boundary conditions for CBOE options," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 187-211.
- Muller, Ulrich A. & Dacorogna, Michel M. & Olsen, Richard B. & Pictet, Olivier V. & Schwarz, Matthias & Morgenegg, Claude, 1990. "Statistical study of foreign exchange rates, empirical evidence of a price change scaling law, and intraday analysis," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1189-1208, December.
- Evnine, Jeremy & Rudd, Andrew, 1985. " Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-56, July.
- 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.
- Bodurtha, James N, Jr & Courtadon, Georges R, 1986. " Efficiency Tests of the Foreign Currency Options Market," Journal of Finance, American Finance Association, vol. 41(1), pages 151-62, March.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:19:y:2008:i:2:p:157-170. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.