An examination of the Australian Stock Exchange and Australian Financial Review's fair values

Abstract

PurposeThe paper seeks to examine fair values provided by the Australian Stock Exchange (ASX) and reported daily in the Australian Financial Review to determine whether they violate fundamental option relationships.Design/methodology/approachValues reported in the Australian Financial Review from 4 January 2005 to 31 March 2005 are examined.FindingsThe results document that between 1 and 2 per cent violate the most fundamental option relationships, specifically the requirement for call and put option values to increase as term to expiry increases, and for call (put) option values to increase (decrease) as exercise price decreases. Further, the magnitude of these violations is too large to be explained solely by the bid‐ask spread. They are, nevertheless, consistent with staleness. Further, in nearly 30 per cent of cases these fair values violate the basic put‐call parity relationship. The type of these violations is also consistent with these values being stale.Research limitations/implicationsSimple screens should be included to remove fair values that breach the most basic relationships.Originality/valueThe paper is the first to highlight flaws in fair values provided by the Australian Stock Exchange (ASX) and reported in the Australian Financial Review.