Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

Fung, Joseph K. W.; Mok, Henry; Wong, Kenneth C.K.

doi:10.1111/j.0732-8516.2004.00083.x

Cited by 8 publications

(6 citation statements)

References 17 publications

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“…Often an abnormally high excess return (higher than 100%) is also available. These results are contrary to the results of most similar studies carried out with the high-frequency data and European options (for instance, refer to Benzion et al, 2005;Bharadwaj & Wiggins, 2001;Fung et al, 2004). Only Hemler and Miller (1997), for postcrash period, have similar findings.…”

Section: Resultscontrasting

confidence: 99%

“…Benzion et al (2005) identify 4,505 profitable box spreads. Fung et al (2004) construct 5,783 box spreads. Hemler and Miller (1997), using 38,000 quotations, identify about 2,700 profitable box spreads.…”

Section: Introductionmentioning

confidence: 99%

“…and Wiggins (2001), Fung et al (2004), and Benzion et al (2005). The inefficiency may be partially caused by the restriction on short sales.…”

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confidence: 99%

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Box‐spread arbitrage efficiency of Nifty index options: The Indian evidence

Vipul

2009

Journal of Futures Markets

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This study examines the market efficiency for the European style Nifty index options using the box-spread strategy. Time-stamped transactions data are used to identify the mispricing and arbitrage opportunities for options with this modelfree approach. Profit opportunities, after accounting for the transaction costs, are quite frequent, but do not persist even for two minutes. The mispricing is higher for the contracts with higher liquidity (immediacy) risk captured by the moneyness (the difference between the strike prices and the spot price) and the volatility of the underlying.

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Section: Resultscontrasting

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Box‐spread arbitrage efficiency of Nifty index options: The Indian evidence

Vipul

2009

Journal of Futures Markets

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“…Even after making the assumption of no transaction costs, they found very few low-profit arbitrage opportunities. Fung et al 2004 in their study examined the pricing efficiency of Hang Seng Index options market in Hong Kong, which is an emerging market and thinly traded, by making use of Box spread Strategy. The study was based on 20 months of tick-by-tick bid-ask and transaction quotes.…”

Section: Literature Reviewmentioning

confidence: 99%

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

Girish

Rastogi

2014

GADJAH MADA INT. J. BUS.

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Box spread is a trading strategy in which one simultaneously buys and sells options having the same underlying asset and time to expiration, but different exercise prices. This study examined the efficiency of European style S&P CNX Nifty Index options of National Stock Exchange, (NSE) India by making use of high-frequency data on put and call options written on Nifty (Time-stamped transactions data) for the time period between 1 st January 2002 and 31 st December 2005 using box-spread arbitrage strategy. The advantages of box-spreads include reduced joint hypothesis problem since there is no consideration of pricing model or market equilibrium, no consideration of inter-market non-synchronicity since trading box spreads involve only one market, computational simplicity with less chances of misspecification error, estimation error and the fact that buying and selling box spreads more or less replicates risk-free lending and borrowing. One thousand three hundreds and fifty eight exercisable boxspreads were found for the time period considered of which 78 Box spreads were found to be profitable after incorporating transaction costs (32 profitable box spreads were identified for the year 2002, 19 in 2003, 14 in 2004 and 13 in 2005) The results of our study suggest that internal option market efficiency has improved over the years for S&P CNX Nifty Index options of NSE India. Abstrak:Box spread adalah strategi trading dimana seseorang dapat secara simultan membeli dan menjual option yang memiliki dasar aset dan waktu berakhir yang sama, namun dengan harga latihan yang berbeda. Penelitian ini menguji efisiensi gaya Eropa S&P CNX Nifty Index Option pada Bursa Efek Nasional di India dengan memanfaatkan data frekuensi tinggi pada put dan call option yang tertulis di Nifty (data transaksi cap waktu) untuk periode antara 1 Januari sampai 1 Desember 2005 dengan menggunakan strategi arbritase box spread. Keuntungan dari box spread adalah berkurangnya masalah hipotesis gabungan karena tidak ada pertimbangan atas model harga atau ekuilibrium pasar modal, tidak ada pertimbangan atas non-sinkronitas antarpasar modal karena box spread perdagangan hanya meliputi satu pasar modal, kemudahan komputasional dengan berkurangnya kesalahan spesifikasi, kesalahan estimasi, dan fakta bahwa pembelian dan penjualan box spread kurang lebih menggandakan pinjam-meminjam yang bebas resiko. Sebanyak 1358 box spread ditemukan dan sebanyak 78 box spread dianggap menguntungkan setelah Acknowledgement

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“…For example, studies have found that market prices increase with the level of quality uncertainty under monopolistic competition and monopoly (Bagwell and Riordan 1991;Dranove and Satterthwaite 1992), that different types of market structures often influence how price changes (Axarloglou 2007;Carlton 1986;Domberger and Fiebig 1993), and that price formation in securities markets can be (Biais 1993;Easley et al 1996;Easley and O'Hara 1987;Fung et al 2004). It should be noted, however, that online auctions are substantially different from traditional auctions; which typically attract a small number of participants who often need to be physically present, involve high transaction costs, and offer a limited scope of items that typically are non-standardized.…”

Section: Introductionmentioning

confidence: 99%

Market structure and quality uncertainty: a theoretical framework for online auction research

Hou

Blodgett

2010

Electron Markets

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Given large numbers of buyers and sellers, with access to a wide variety of information, economic theory suggests that online auction markets should provide an efficient mechanism for establishing equilibrium prices. Previous research on online auction prices, however, is far from conclusive, having produced mixed findings. The seemingly inconsistent and sometimes contradictory results make it very difficult to integrate empirical findings into a coherent body of knowledge. The purpose of this paper is to present a framework that can reconcile previous findings and provide direction for future research. Accordingly, we propose a simple theoretical framework with two dimensions-market structure (thick vs. thin) and quality uncertainty (high vs. low). By examining the literature in the context of market structure and quality uncertainty we find that previous studies are not necessarily at odds, but that there is actually a fairly consistent pattern of results.

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Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

Cited by 8 publications

References 17 publications

Box‐spread arbitrage efficiency of Nifty index options: The Indian evidence

Box‐spread arbitrage efficiency of Nifty index options: The Indian evidence

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

Market structure and quality uncertainty: a theoretical framework for online auction research

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