The limitation of monotonicity property of option prices: an empirical evidence

Chuang Yuang Lin, Dar Hsin Chen and Chin Yu Tsai

Applied Economics, 2011, vol. 43, issue 23, 3103-3113

Abstract: Many option pricing models are based on the assumption that the underlying asset price follows one-dimensional diffusion process. An alternative approach is to test the properties that should hold for all models based on a given stochastic process for the underlying asset. Following Perignon (2006), we test the empirical validity of the monotonicity property for option prices by collecting all transaction data from 1 July 2006 to 31 December 2006 for option contracts traded on the Taiwan Futures Exchange (TAIFEX). We find that sampled intraday option prices violate the monotonicity property between 29.97% and 57% of the time, and that call and put prices often increase, or decrease, together. We also find evidence to show that the frequent violations of the monotonicity property are to a large extent attributable to microstructure effects and that they arise from rational trading tactics.

Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/00036840903427265 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:43:y:2011:i:23:p:3103-3113

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036840903427265

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().