Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-09T08:01:14.619Z Has data issue: false hasContentIssue false
  • English
  • Français

Daily and Intradaily Tests of European Put-Call Parity

Published online by Cambridge University Press:  06 April 2009

Avraham Kamara  and
Thomas W. Miller Jr
Avraham Kamara
Affiliation:
School of Business Administration, University of Washington, Seattle, WA 98195
Thomas W. Miller Jr
Affiliation:
College of Business and Public Administration, University of Missouri, Columbia, MO 65211
Get access Rights & Permissions [Opens in a new window]

Abstract

Existing empirical studies of the put-call parity condition report frequent, substantial violations. An important problem in interpreting these results is that these studies all investigate American options. While some of these studies attempt to reduce the effects of possible early exercise on their tests, they cannot fully account for the effect of early exercise. Therefore, it is not possible to conclude from these studies whether, or to what extent, observed put-call parity violations are due to market inefficiency or due to the value of early exercise. We avoid the early exercise problem by testing put-call parity using European options. We find violations that are much less frequent and smaller than the studies using American options. Moreover, these violations reflect premia for liquidity (immediacy) risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 4 , December 1995 , pp. 519 - 539
Copyright
Copyright © School of Business Administration, University of Washington 1995

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Mendelson, H.. “Trading Mechanisms and Stock Returns: An Empirical Investigation.” Journal of Finance, 42 (07 1987), 533–553.CrossRefGoogle Scholar
Black, F. “Fact and Fantasy in the Use of Options.” Financial Analyst Journal, 31 (07/08 1975), 36–72.CrossRefGoogle Scholar
Brenner, M., and Galai, D.. “Implied Interest Rates.” Journal of Business, 59 (07 1986), 493–508.CrossRefGoogle Scholar
Chance, D. M. “Parity Tests of Index Options.” Advances in Futures and Options Research, 2 (1987), 47–64.Google Scholar
Chung, Y. P. “A Transaction Data Test of Stock Index Futures Market Efficiency and Index Arbitrage Profitability.” Journal of Finance, 46 (12 1991), 1791–1809.CrossRefGoogle Scholar
Cox, J. C., and Rubinstein, M.. Options Markets. Englewood Cliffs, NJ: Prentice-Hall (1985).Google Scholar
Evnine, J., and Rudd, A.. “Index Options: The Early Evidence.” Journal of Finance, 40 (07 1985), 743–755.CrossRefGoogle Scholar
Figlewski, S. “Hedging Performance and Basis Risk in Stock Index Futures.” Journal of Finance, 39 (07 1984), 657–669.CrossRefGoogle Scholar
French, K. R.; Schwert, G. W.; and Stambaugh, R. F.. “Expected Stock Returns and Volatility.” Journal of Financial Economics, 19 (09 1987), 3–29.CrossRefGoogle Scholar
Galai, D. “Tests of Market Efficiency of the CBOE.” Journal of Business, 50 (04 1977), 167–197.CrossRefGoogle Scholar
Garbade, K. D., and Silber, W. L.. “Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk.” Journal of Finance, 34 (06 1979), 577–593.CrossRefGoogle Scholar
Gould, J. P., and Galai, D.. “Transaction Costs and the Relationship between Put and Call Prices.” Journal of Financial Economics, 1 (07 1974), 105–129.CrossRefGoogle Scholar
Grossman, S. J., and Miller, M. H.. “Economic Costs and Benefits of the Proposed One-Minute Time Bracketing Regulation.” Journal of Futures Markets, 6 (Spring 1986), 141–166.CrossRefGoogle Scholar
Harris, L.; Sofianos, G.; and Shapiro, J. E.. “Program Trading and Intraday Volatility.” Review of Financial Studies, 7 (Winter 1994), 653–685.CrossRefGoogle Scholar
Harvey, C. R., and Whaley, R. E.. “S&P 100 Index Option Volatility.” Journal of Finance, 46 (09 1991), 1551–1561.CrossRefGoogle Scholar
Hoaglin, D. C.; Mosteller, F.; and Tukey, J. W.. Understanding Robust and Exploratory Data Analysis. New York, NY: John Wiley & Sons (1983).Google Scholar
Jameson, M., and Wilhelm, W.. “Market Making in the Options Markets and the Cost of Discrete Hedge Rebalancing.” Journal of Finance, 47 (06 1992), 765–779.CrossRefGoogle Scholar
Kamara, A. “Market Trading Structures and Asset Pricing: Evidence from the Treasury-Bill Markets.” Review of Financial Studies, 1 (Winter 1988), 357–375.CrossRefGoogle Scholar
Kamara, A. “Liquidity, Taxes, and Short-Term Treasury Yields.” Journal of Financial and Quantitative Analysis, 29 (09 1994), 403–417.CrossRefGoogle Scholar
Kamara, A.; Miller, T. W. Jr.,; and Siegel, A. F.. “The Effect of Futures Trading on the Stability of Standard and Poor's 500 Returns.” Journal of Futures Markets, 12 (12 1992), 645–658.CrossRefGoogle Scholar
Kawaller, I. G. “Comment: Security Markets, Information, and Liquidity: Extensions to Futures and Options.” Financial Practice and Education, 1 (Fall 1991), 17–18.Google Scholar
Kleidon, A. W., and Whaley, R. E.. “One Market? Stocks, Futures and Options during October 1987.” Journal of Finance, 47 (07 1992), 851–877.CrossRefGoogle Scholar
Klemkosky, R. C., and Resnick, B. G.. “Put-Call Parity and Market Efficiency.” Journal of Finance, 34 (12 1979), 1141–1155.Google Scholar
Klemkosky, R. C., and Resnick, B. G.. “An Ex Ante Analysis of Put-Call Parity.” Journal of Financial Economics, 8 (12 1980), 363–378.CrossRefGoogle Scholar
Lee, L., and Maddala, G. S.. “The Common Structure of Tests for Selectivity Bias, Serial Correlation, Heteroscedasticity, and Non-Normality in the Tobit Model.” International Economic Review, 26 (02 1985), 1–20.CrossRefGoogle Scholar
Maddala, G. S.Limited Dependent and Qualitative Variables in Econometrics. New York, NY: Cambridge Univ. Press (1989).Google Scholar
Martin, D. W., and French, D. W.. “The Characteristics of Interest Rates and Stock Variances Implied in Option Prices.” Journal of Economics and Business, 39 (08 1987), 279–288.CrossRefGoogle Scholar
Merton, R. C. “The Relationship between Put and Call Option Prices: Comment.” Journal of Finance, 28 (03 1973), 183–184.CrossRefGoogle Scholar
Miller, T. W., and Neal, R.. “Time-Varying Execution Costs for Index Arbitrage.” Mimeo, Univ. of Missouri and Federal Reserve Bank of Kansas City (1994).Google Scholar
Modest, D. M., and Sundaresan, M.. “The Relationship between Spot and Futures Prices in Stock Index Futures Markets: Some Preliminary Evidence.” Journal of Futures Markets, 3 (Fall 1983), 15–41.CrossRefGoogle Scholar
Morrison, D. F.Multivariate Statistical Methods. New York, NY: McGraw-Hill (1976).Google Scholar
Ronn, A. G., and Ronn, E. I.. “The Box Spread Arbitrage Conditions: Theory, Tests, and Investment Strategies.” Review of Financial Studies, 2 (Spring 1989), 91–108.CrossRefGoogle Scholar
Stoll, H. R. “The Relationship between Put and Call Option Prices.” Journal of Finance, 28 (12 1969), 801–824.CrossRefGoogle Scholar
Stoll, H. R., and Whaley, R. E.. “Stock Market Structure and Volatility.” Review of Financial Studies, 3 (Spring 1990), 37–71.CrossRefGoogle Scholar