Quote Inefficiency in Options Markets
Posted: 22 Nov 2015
Date Written: 2015
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: Suggested Citation