Empirical Evidence on Put-Call Parity in Australia: A Reconciliation and Further Evidence

Abstract

The results of the put-call parity studies by Loudon (1988) and Taylor (1990) are in direct conflict despite the authors reporting the use of virtually identical models and methods. Employing an improved version of Taylor's data collection procedures, we test the parity theorem in the period studied by Loudon. The results are similar to those of Loudon. As a result, we run separate checks of Taylor's data and analysis. The check of the data reveals that over sixty per cent of Taylor's observations are invalid. The check of the analysis reveals that the lower boundary of the put-call parity relation was incorrectly calculated by Taylor. Correcting this error results in fundamentally different conclusions. anonymous referees of this journal. We have also benefited from comments made at a seminar of the Department of Accounting and Finance, Monash Univerity, Clayton. We are also grateful for financial support provided by the Faculty of Economics Commerce and Management, Monash University. We are particularly indebted to Stephen Taylor who provided us with his data and made comments on earlier drafts.

Cross‐market efficiency in the Indian derivatives market: A test of put–call parity

“…This proposition is supported by the lower open interests and trades in the put contracts, as compared with those in the call contracts. These findings are consistent with those of Evnine and Rudd (1985), Finucane (1991), Brown and Easton (1992), Chesney et al (1994), Mittnik and Rieken (2000), Bharadwaj and Wiggins (2001), and Ofek et al (2004) for different …”

“…The put options are overpriced more often than the call options owing to the restrictions on short sales in the cash market. This phenomenon is also observed in the developed markets (refer to Bharadwaj & Wiggins, 2001;Brown & Easton, 1992;Chesney et al, 1994;Evnine & Rudd, 1985;Finucane, 1991;Mittnik & Rieken, 2000;Ofek et al, 2004). The mispricing increases for the less liquid options, which are farther from the money, and also during the periods of high volatility of the underlying.…”

Efficiency of the foreign currency options market

“…A number of studies have empirically tested the PCP theorem for individual stock option markets and index option markets. The major studies include, but not limited to: Gould and Galai (1974); Geske and Roll (1984); Klemkosky and Resnick (1979); Evnine and Rudd (1985); Gray (1989);Tylor (1990);Finucane (1991);Francfurter and Leung (1991); Brown and Easton (1992);Easton (1994); Kamara and Miller (1995); Wagner et al (1996); Broughton et al (1998);Mittnick and Rieken (2000); Bharadwaj and Wiggins (2001); Garay et al (2003). The 4 results of these studies are mixed; a vast majority of them tend to reject PCP.…”

Put-Call Parity in Indian Stock Markets post Turmoil Settlement

“…Arbitrage profit is defined as the monetary profit arising out of the difference between the actual value and theoretical value of selected put-call sets. We also use the framework of Brown, Easton (1992) for liquid options and stock markets, the in the sampling process.…”