Index Options‐Futures Arbitrage: A Comparative Study with Bid/Ask and Transaction Data

Fung, Joseph K. W.; Mok, Henry

doi:10.1111/j.1540-6288.2001.tb00005.x

Cited by 19 publications

(31 citation statements)

References 13 publications

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“…Following Diamond and Verrecchia (1987), who show that restricting short sales slows down the downward adjustment in security prices in reflecting bearish information, Fung and Jiang (1999) examine the error-correction dynamics between the index and the futures. Fung and Jiang found that the lead in price changes from futures 9 For related studies on the arbitrage relationship between the index options and index futures for the Hong Kong market, see , , Cheng et al (1998), and Fung and Mok (2001, 2003. 10 This is important for quasi-arbitrage, see, for example, Chan (1992) and Neal (1996).…”

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confidence: 98%

Discretionary government intervention and the mispricing of index futures

Draper

Fung

2003

Journal of Futures Markets

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1160Draper and Fung 1 Naranjo and Nimalendran (2000) find that the Federal Reserve and the Bundesbank intervened in the dollar-mark market on 704 and 1,166 days, respectively, out of 4,723 trading days between January 1976 and December 1994. 2 The Taiwan government occasionally intervenes in the market through the operation of a stock market support fund. The interventions are of relatively small magnitude. the pricing relationship between the Hang Seng Index futures and the cash index during the period of the Asian financial crisis. The study avoids infrequent trading and nonexecution problems by using tradeable bid and offer quotes for the constituent stocks of the index. The results show that arbitrage efficiency was impeded during, and in the immediate aftermath of, the intervention. The findings suggest that discretionary government action introduces an additional risk factor for arbitrageurs that continues to disrupt normal market processes even after the government ceases to intervene. The continued disruption following the government's actions in the market also stems from a poorly developed stock loan market that impedes short selling, as well as a lack of liquidity in the market.

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confidence: 98%

Discretionary government intervention and the mispricing of index futures

Draper

Fung

2003

Journal of Futures Markets

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“…In addition, quote data may result in illusory ex ante profits if the quotes are stale (Hemler & Miller, 1997). As a result, the appropriateness of using trade or quote mispricing as signals is an empirical issue (Fung & Mok, 2001). In this study, the impact of execution delay is analyzed using both trade and quote data.…”

Section: C(t T) ϫ P(t T) ϫ Sc ϫ Tc]e R(tϫt) ϩ K յ F(t T) յ [C(t Tmentioning

confidence: 98%

“…Most studies perform both ex post and ex ante tests for the analysis of pricing efficiency or trading performance. See, for example, Chung (1991), Klemkosky and Lee (1991), and Chu and Hsieh (2002) on index arbitrage; Kamara and Miller (1995) on put-call-spot arbitrage; Lee and Nayar (1993), , Cheng et al (2000), Fung and Mok (2001), and Draper and Fung (2002) on put-call-futures arbitrage; and Hemler and Miller (1997) on box spread arbitrage.…”

Section: Decomposition Of Execution Delaymentioning

confidence: 98%

“…3 Further, alternative trading strategies are proposed to mitigate the impact of execution delay. These quasi-arbitrage strategies echo the proposals of Ronn and Ronn (1989) and Fung and Mok (2001). In examination of box spread trading, Ronn and Ronn (1989) implement a conservative strategy that executes long option positions before initiation of the short counterparty positions and a fill-or-kill strategy that requires all positions to be completed within 10 minutes of a prespecified lag time.…”

Section: Introductionmentioning

confidence: 97%

“…In examination of box spread trading, Ronn and Ronn (1989) implement a conservative strategy that executes long option positions before initiation of the short counterparty positions and a fill-or-kill strategy that requires all positions to be completed within 10 minutes of a prespecified lag time. Fung and Mok (2001) suggest practitioners can enhance profits by developing trading strategies to hit particular quotes. This study contributes to this line of research by proposing strategies that selectively leg into positions depending on the immediacy of assets to be traded.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The impact of execution delay on the profitability of put‐call‐futures trading strategies—Evidence from Taiwan

Chiou¹,

Hsieh²,

Lin³

2007

Journal of Futures Markets

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This study examines the impact of execution delay on the profitability of put-call-futures quasi-arbitrage strategies using trade and quote data in the Taiwanese market. Assuming order execution at the next immediate price following a mispricing signal, the execution of individual components is traced and a substantial delay resulting from the late execution of an (2001) and Draper and Fung (2002) explored the arbitrage efficiency of the put-call-futures parity relation and showed diminishing ex ante profits for longer execution delays. 2Additional examples are Chung (1991), who applied 20-second, 2-minute, and 5-minute execution delays to the analysis of index arbitrage; Hemler and Miller (1997), who used 1-, 5-, and 15-minute delays for box spread trading ;and Fung and Draper (1999), who used 3-, 5-, 10-, and 15-minute lags for index arbitrage.option is reported. A fill-or-kill strategy that directly restricts such a delay is unsatisfactory because unwinding already acquired positions involves added transaction costs. Ex ante performance is significantly improved for combined strategies that execute the less liquid asset first, while shortening the time before acquisition of the first position.

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