Efficiency in index options markets and trading in stock baskets

Abstract

The authors thank Brian Hatch, Shane Johnson, and Dan Waggoner for helpful comments. They also gratefully acknowledge financial support of the Social Sciences and Humanities Research Council of Canada. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Efficiency of S&P CNX Nifty Index Option of the National Stock Exchange (NSE), India, using Box Spread Arbitrage Strategy

“…They found frequent and substantial violations of the box spread relationship, even though their analysis reflected transaction costs. The results obtained by Ackert and Tian (2001), do not provide any support for options market efficiency of CBOT improving over time. Bharadwaj and Wiggins (2001) in their study examined the box spread arbitrage conditions for S&P 500 LEAPS market of Chicago Board Options Exchange (CBOE).…”

“…However, in the discussion of their results and conclusion, they warned that some quotes might not have been executed, due to stale prices, indicating some arbitrage profits may have been virtually impossible to achieve. Ackert and Tian (2001) in their study examined the efficiency of S&P 500 index options of the Chicago Board of Trade (CBOT) by considering a sample consisting of daily closing option prices between February 1992 and January 1993. They found frequent and substantial violations of the box spread relationship, even though their analysis reflected transaction costs.…”

“…As seen from section 2, literature on the efficiency of Index options has mostly been studied for: US Markets [i.e. Billingsley and Chance (1985) for U.S Stock Options market, Ronn and Ronn (1989) for CBOE options, Marchand et al (1994) for S&P 500 Futures Options, Hemler and Miller (1997) for S&P 500 Index options of CBOE, Ackert and Tian (2001) for CBOT, Evnine and Rudd (1985) and Kamara and (Miller1995) Computerized trading allows the traders to identify and execute arbitrage opportunities with greater ease and speed and lower transaction costs (using computer programs); f) Transaction costs are comparatively less for arbitrageurs due to order-driven trading mechanism and cash settlement of derivatives. But, ban on short sales in the cash market of NSE India, would affect the efficiency negatively.…”

Exchange Traded Funds: History, Trading, and Research

“…Their efficiency seems to improve over time, as evidenced by Ackert and Tian (1998) on the Toronto Stock Exchange when TIPs were launched or by Ackert and Tian (2001) on the CBOE when SPDRs were launched. However, they find no clear effect on the link between stock and index options markets as measured by sole deviations to relationships that require trading in the index.…”

Empirical investigation of stock index futures market efficiency: the case of the Athens Derivatives Exchange

“…When market makers sell short stocks that were borrowed, 150% of the proceeds should be deposited in a margin account and as a result the short sales proceeds parameter is always zero ( br k m = 0). The cost of borrowing stocks is set equal to of the index value in order to reflect the opportunity cost of having 150% of the proceeds in a margin account earning no interest (see Ackert and Tian, 2001, for a similar approach). For large institutional traders we use since they can always engage into (quasi) arbitrage trading with stocks that they already hold (a similar assumption is used by Bühler and Kempf, 1995 between 0 and 1% of the index level in order to approximate for other market impact costs that can result to tracking error.…”