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Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

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  • Laurent Deville
  • Fabrice Riva

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 Exchange Traded Fund also affects the survival rates of deviations, but this impact essentially stems from the reduction in the level of potential arbitrage profits. Copyright 2007, Oxford University Press.

Suggested Citation

  • Laurent Deville & Fabrice Riva, 2007. "Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach," Review of Finance, European Finance Association, vol. 11(3), pages 497-525.
  • Handle: RePEc:oup:revfin:v:11:y:2007:i:3:p:497-525
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    File URL: http://hdl.handle.net/10.1093/rof/rfm021
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    References listed on IDEAS

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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. 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.
    3. F. Riva & A. Calamia & L. Deville, 2013. "Liquidity in European equity ETFs: What really matters?," Post-Print hal-00846610, HAL.
    4. Thierry Foucault & Roman Kozhan & Wing Wah Tham, 2017. "Toxic Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1053-1094.
    5. Alain François-Heude & Ouidad Yous, 2014. "On the liquidity of CAC 40 index options Market," Working Papers 2014-445, Department of Research, Ipag Business School.
    6. Lee, Jaeram & Kang, Jangkoo & Ryu, Doojin, 2015. "Common deviation and regime-dependent dynamics in the index derivatives markets," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 1-22.

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    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other

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