Efficiency in Index Options Markets and Trading in Stock Baskets

Federal Reserve Bank of Atlanta, Research Department Working Paper No. 99-5

Posted: 5 Nov 1999

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Yisong S. Tian

York University - Schulich School of Business

Date Written: June 1999

Abstract

Researchers have reported mispricing in index options markets. This study further examines the efficiency of the S&P 500 index options market by testing theoretical pricing relationships implied by no-arbitrage conditions. The effect of a traded stock basket, Standard and Poor's Depository Receipts (SPDRs), on the link between index and options markets is also examined. Pricing efficiency within options markets improves, and the evidence supports the hypothesis that a stock basket enhances the connection between markets. However, when transactions costs and short sales constraints are included, very few violations of the pricing relationships are reported.

JEL Classification: G13, G14

Suggested Citation

Ackert, Lucy F. and Tian, Yisong Sam, Efficiency in Index Options Markets and Trading in Stock Baskets (June 1999). Federal Reserve Bank of Atlanta, Research Department Working Paper No. 99-5. Available at SSRN: https://ssrn.com/abstract=187435

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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