An Empirical Study of the Cross Market Efficiency of the Index Options Market: A Case Study from the Italian Derivatives Market

Forthcoming, Review of Accounting and Finance

36 Pages Posted: 25 Jan 2018 Last revised: 27 Apr 2018

See all articles by Izidin El Kalak

Izidin El Kalak

Cardiff Business School

Robert Hudson

Hull University Business School (HUBS)

Date Written: April 17, 2018

Abstract

This study examines the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) between 1st October 2007 and 31st December 2012, a period including the financial crisis, using daily option prices. Two fundamental no-arbitrage conditions are tested: the lower boundary condition (LBC) and the put/call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex-post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex-post tests, ex-ante tests were applied to PCP violations occurring within a one-day lag. The results showed a significant drop in the number of profitable arbitrage strategies. Overall, the number and monetary value of the violations reported declined during the post financial crisis period compared to those during the financial crisis period. The findings obtained from these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported.

Keywords: cross-market efficiency; index options market; no-arbitrage conditions; financial crisis

JEL Classification: G01, G14

Suggested Citation

El Kalak, Izidin and Hudson, Robert, An Empirical Study of the Cross Market Efficiency of the Index Options Market: A Case Study from the Italian Derivatives Market (April 17, 2018). Forthcoming, Review of Accounting and Finance, Available at SSRN: https://ssrn.com/abstract=3103809 or http://dx.doi.org/10.2139/ssrn.3103809

Izidin El Kalak (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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