Uncertainty of Put-Call Parity Violation and Option Returns

47 Pages Posted: 4 Aug 2022 Last revised: 23 Aug 2022

See all articles by Chun Liu

Chun Liu

University of Toronto; Tsinghua University - School of Economics and Management

Tianyu Wang

Tsinghua University, School of Economics and Management

Yintian Wang

Tsinghua University

Hong Xiang

The Hong Kong Polytechnic University

Date Written: May 1, 2022

Abstract

This paper presents a new robust predictor for option returns: the uncertainty of put-call parity violation (VVS). We find that the delta-hedged equity option return decreases monotonically with VVS. Although VVS is highly correlated with the classical uncertainty and limit-to-arbitrage measures, the predictability still cannot be explained by standard factors such as jump and volatility risks, short-sale constraints, and stock lottery characteristics. It is also inconsistent with constrained option market makers, since the results are almost similar after controlling for market makers' order flows.

Keywords: Option returns, put-call parity violation, volatility-of-volatility

JEL Classification: G10, G12, G13

Suggested Citation

Liu, Chun and Liu, Chun and Wang, Tianyu and Wang, Yintian and Xiang, Hong, Uncertainty of Put-Call Parity Violation and Option Returns (May 1, 2022). Available at SSRN: https://ssrn.com/abstract=4177394 or http://dx.doi.org/10.2139/ssrn.4177394

Chun Liu

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

Tianyu Wang

Tsinghua University, School of Economics and Management ( email )

Beijing, 100084
China

Yintian Wang

Tsinghua University ( email )

Beijing, 100084
China

Hong Xiang (Contact Author)

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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