Quote Inefficiency in Options Markets

Posted: 22 Nov 2015

See all articles by Iñaki Rodríguez-Longarela

Iñaki Rodríguez-Longarela

Stockholm University - Stockholm Business School; UiT-The Arctic University of Norway - School of Business and Economics

Silvia Mayoral Blaya

Universidad Carlos III de Madrid

Date Written: 2015

Abstract

In an arbitrage-free economy with non-zero bid-ask spreads the existence of payoffs whose price is lower than the price of a dominated payoff cannot be discarded in general. However, when the former price corresponds to trivial portfolios which involve buying or selling one unit of the basis assets, its presence, although not an arbitrage, is a severe market anomaly which we refer to as an inefficient quote. In an empirical study, we report evidence that indicates that in options markets both the frequency and the magnitude of these anomalies are substantial and we document puzzling patterns in their behavior.

Keywords: Inefficient quotes, Bid-ask spread, Law of one price, Index options

JEL Classification: C61, C63, D4, G1

Suggested Citation

Rodríguez Longarela, Iñaki and Mayoral Blaya, Silvia, Quote Inefficiency in Options Markets (2015). Journal of Banking and Finance, Vol. 55, 2015. Available at SSRN: https://ssrn.com/abstract=2693655

Iñaki Rodríguez Longarela (Contact Author)

Stockholm University - Stockholm Business School ( email )

Stockholm
Sweden

UiT-The Arctic University of Norway - School of Business and Economics ( email )

Tromsø, 9037
Norway

Silvia Mayoral Blaya

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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