The Factors behind Put-Call Parity Violations of S&P 100 Index Options

Drew Wagner, David M Ellis and David A Dubofsky

The Financial Review, 1996, vol. 31, issue 3, 535-52

Abstract: This paper examines the determinants of intraday violations of put-call parity of S&P 100 index options. In particular, tobit regression analysis is used to explain the fraction of daily observations that are apparently mispriced. Compared to a previous study, a much smaller fraction (21 percent) is found of option pairs that violate parity. Dividends are found to be significant but inversely related to the frequency of violations. The other significant explanatory variable is the options' time to expiration. When the upper bound is violated, the coefficient is positive; i.e., calls are overpriced relative to puts more often for longer term options. The coefficient for the time to expiration is significantly negative for lower bound violations. Copyright 1996 by MIT Press.

Date: 1996
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