Efficiency in index options markets and trading in stock baskets

Lucy Ackert and Yisong S. Tian

No 99-5, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Researchers have reported mispricing in index options markets. This study further examines the efficiency of the S&P 500 index options market by testing theoretical pricing relationships implied by no-arbitrage conditions. The effect of a traded stock basket, Standard and Poor's Depository Receipts (SPDRs), on the link between index and options markets is also examined. Pricing efficiency within options markets improves, and the evidence supports the hypothesis that a stock basket enhances the connection between markets. However, when transactions costs and short sales constraints are included, very few violations of the pricing relationships are reported.

Keywords: options; Stock - Prices (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (2)

Published in Journal of Banking and Finance, September 2001

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