Nonsimultaneity and Futures Option Pricing: Simulation and Empirical Evidence

Robert E.J. Hibbard, Rob Brown and Keith McLaren

No 13/02, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: Empirical tests of option pricing models are joint tests of the 'correctness' of the model, the efficiency of the market and the simultaneity of price observations. Some degree of nonsimultaeity can be expected in all but the most liquid markets and is therefore evident in many non-US markets. Simulation results indicate that nonsimultaneity is potentially a significant problem in empirical tests of futures option pricing models. Empirical results using Australian data show that a five-minute window for matching transactions does not remove the nonsimultaneity bias for near-the-money and out-of-the money options. A more accurate matching may therefore be required. The nonsimultaneity bias is effectively removed if a five-minute window is employed for in-the-money options.

Keywords: Nonsimultaneity; Futures option; Mispricing (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2002-12
New Economics Papers: this item is included in nep-cfn, nep-cmp, nep-fin, nep-fmk and nep-rmg
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