Evidence on inefficiency of the Euribor option market

I.-Doun Kuo and Yueh-Neng Lin

Applied Financial Economics, 2009, vol. 19, issue 12, 1009-1017

Abstract: This article examines the efficiency of the Euro Inter-bank Offered Rate (Euribor) option market based on a constant-volatility option pricing model of Heath et al. (HJM, 1990, 1992) over the period 1 January 2003 to 31 December 2005. Trading mispriced options associated with a riskless hedging strategy on average produce abnormal profits after taking into account the transaction costs for floor traders. For floor traders' point of view, our results show an inefficient Euribor option market for our sample period. For retail customers, however, trading associated with the riskless hedging strategy the abnormal profits may not be earned sufficiently to cover the transaction costs.

Date: 2009
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DOI: 10.1080/09603100701604266

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