Time to Efficiency of the French CAC 40 Index Options Market
45 Pages Posted: 12 Jun 2004
Date Written: February 2003
Abstract
In this paper, we use intradaily data and adopt an ex ante approach, replicating as closely as possible execution conditions available to traders on the CAC 40 option index contract between August 2000 and July 2001. Taking the ex post distortions to put-call parity as signals for the construction of ex ante arbitrage portfolios, we first compute the effective arbitrage profits accessible after fixed execution delays. These profits appear to be decreasing with the length of the delay. We further investigate the informational efficiency through the development of an original indicator we call time to efficiency, which is simply the time necessary for the market to meet prices compatible with no arbitrage once an ex post deviation has been identified. These dynamical approaches allow us to evidence the positive influence of ETFs on efficiency since the persistence time of deviation has been cut by half following their introduction on the French market.
Keywords: Index options, Exchange Traded Funds, Market efficiency, Put-call parity, Ex ante tests
JEL Classification: G13, G14
Suggested Citation: Suggested Citation
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