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Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market

Chin‐Ho Chen, Huimin Chung and Shu‐Fang Yuan

Journal of Futures Markets, 2014, vol. 34, issue 12, 1122-1145

Abstract: This study examines whether deviations from put–call parity are informative about future volatility in the underlying index. Using the difference in implied volatility between call and put options to measure these deviations, we find that deviations from put–call parity predict future volatility. The predictability becomes stronger as option liquidity increases and the liquidity of the underlying index decreases. The results for volatility prediction remain significant even after controlling for implied volatility, information shocks, other information variables on return and volatility used widely in the literature, and short sales constraints. In addition, our results also show that deviations from put–call parity contain information about the future trading volume of options and the underlying index. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:1122–1145, 2014

Date: 2014
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