Econometric Modeling for Transaction Cost-Adjusted Put-Call Parity: Evidence from the Currency Options Market

9 Pages Posted: 19 Jan 2010

See all articles by Ariful Hoque

Ariful Hoque

University of Southern Queensland

Date Written: January 17, 2010

Abstract

Due to the mispricing of options, no-arbitrage condition put-call parity (PCP) violations lead to inefficiency in the currency options market. Through transaction costs, the effects of these violations are reduced to negligible levels, indicating that PCP is not a sufficient condition for an options market efficiency test. Thus, this study developed a transaction cost-adjusted put-call parity (TC-Adj-PCP) econometric model to examine the efficiency of options markets. The fundamental analysis of the proposed model concludes that transaction costs represent an omitted variable for the PCP model, where the uniqueness of this variable is demonstrated under PCP in the context of options market efficiency. The novelty of the TC-Adj-PCP model resolves controversial transaction costs issues for traders and researchers.

Keywords: Put-call parity, transaction costs, omitted variable, serial correlation, ARCH

JEL Classification: G13, G14

Suggested Citation

Hoque, Ariful, Econometric Modeling for Transaction Cost-Adjusted Put-Call Parity: Evidence from the Currency Options Market (January 17, 2010). Available at SSRN: https://ssrn.com/abstract=1537834 or http://dx.doi.org/10.2139/ssrn.1537834

Ariful Hoque (Contact Author)

University of Southern Queensland ( email )

P.O.Box 238 Darling Heights
Toowoomba, Queensland 4350
Australia

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