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

Abstract

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.

Price discovery in the options markets: An application of put‐call parity

“…With regard to options in the Taiwan market, Chiou, Hsieh, and Lin (2007) test the put-call-futures parity condition and provide evidence on efficiency in the TXO market where arbitrage fails to realize profits, after incorporating trading costs and a reasonable period of execution delay. The findings support the use of the PCP relationship as a means of recovering the optionimplicit spot index.…”