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Efficiency in index options markets and trading in stock baskets
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 ...
Evidence on the efficiency of index options markets
Index options have been one of the most successful of the many innovative financial instruments introduced over the last few decades, as their high trading volume indicates. Given their prominence, the pricing efficiency of these markets is of great importance. ; Detecting inefficient pricing, or mispricing, requires comparing a theoretically efficient price with prices of options traded in financial markets. One popular approach to deriving pricing relationships is based on a principle called no-arbitrage, which simply assumes that arbitrageurs enter the market and quickly eliminate ...