Articlegreen2007

Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

66 citations0/0 files storedEuropean Finance Review

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Financial Markets and Investment Strategies Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

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.

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References

1990Noise Trader Risk in Financial Markets 1984A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market 1980The Extreme Value Method for Estimating the Variance of the Rate of Return 2001Characteristics of Risk and Return in Risk Arbitrage 2003Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs 1993Smart Money, Noise Trading and Stock Price Behaviour 2002Synchronization risk and delayed arbitrage 2004Limited arbitrage and short sales restrictions: evidence from the options markets

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2015Common deviation and regime-dependent dynamics in the index derivatives markets 2013Nonlinearities in CDS-Bond Basis 2011Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index

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