Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

Posted: 14 Jul 2008

See all articles by Laurent Deville

Laurent Deville

EDHEC Business School

Fabrice Riva

Université Paris-Dauphine, PSL Research University

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.

Suggested Citation

Deville, Laurent and Riva, Fabrice, Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach. Review of Finance, Vol. 11, Issue 3, pp. 497-525, 2007. Available at SSRN: https://ssrn.com/abstract=1159308 or http://dx.doi.org/10.1093/rof/rfm021

Laurent Deville (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Fabrice Riva

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

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