The intraday pricing efficiency of Hong Kong Hang Seng Index options and futures markets

Fung, Joseph K. W.; Cheng, Louis T. W.; Chan, Kam C.

doi:10.1002/(sici)1096-9934(199710)17:7<797::aid-fut4>3.0.co;2-i

Cited by 27 publications

(31 citation statements)

References 8 publications

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“…These studies focus exclusively on the highly liquid and developed U.S. options markets. Other studies (e.g., Fung and Mok, 2001;Fung, Cheng, and Chan, 1997;and Bae, Chan, and Cheung, 1998) test the intermarket pricing efficiency of the options and futures market in Hong Kong by using the put-callfutures parity condition. These studies in general find that the options and futures are priced efficiently relative to each other.…”

Section: Box Spread As An Intracommodity Spread Of Synthetic Forward mentioning

confidence: 99%

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

Fung

Mok

Wong

2004

The Financial Review

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Using a box spread arbitrage strategy, we examine the pricing efficiency of the emerging, thinly traded Hang Seng Index options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick-by-tick bid-ask and transaction quotes we find very few arbitrage opportunities. Our examination of the reporting time of quotes shows that in effect, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities supports the pricing rationality hypothesis in the Hong Kong options market.

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Section: Box Spread As An Intracommodity Spread Of Synthetic Forward mentioning

confidence: 99%

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

Fung

Mok

Wong

2004

The Financial Review

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“…These studies find that in general, the options and futures markets are efficient and that their prices are in line with the parity condition. and Fung, Cheng, and Chan (1997), use Hong Kong's Hang Seng Index futures and options contracts to extend the parity relation and study the ex-post and ex-ante profitability of the arbitrage strategy. These studies show that the markets are dynamically efficient for the parity condition: following an arbitrage signal, profitability rapidly declines and disappears within five minutes.…”

Section: According To the Futures Industry Associationmentioning

confidence: 99%

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

Fung

Mok

2001

The Financial Review

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We can infer from bidfask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bidfask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bidfask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.

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“…Lee and Nayar (1993) and Fung and Chan (1994) applied the condition to study the S&P 500 options and futures contracts traded on the Chicago Board Options Exchange and Chicago Mercantile Exchange, respectively. Fung, Cheng, and Chan (1997) and Fung and Fung (1997a) further adapted the condition to study the joint pricing efficiency of the Hang Seng Index options and futures contracts traded on the Hong Kong Futures Exchange. Liouliou (1995) examined the relationship between the FTSE-100 futures European-style (ESX) contracts with daily closing prices for the period February 1992 to February 1995.…”

Section: Arbitrage Efficiency 35mentioning

confidence: 99%

“…The parity condition is also immune to uncertainty over dividend payouts (Fung & Chan, 1994), a factor that is particularly important to most contracts that do not settle against a full performance index. Furthermore, for options and futures that settle against an average of the index, arbitrageurs run the risk of mismatching the settlement value, the average of the index, and the actual closeout value of the equity position (Fung et al, 1997;Yadav & Pope, 1994). To reduce the magnitude of the potential error, arbitrageurs may choose to proportionally close out their equity position over the index at intervals, although this will produce extra market-impact costs (Fung & Fung, 1997b).…”

Section: Arbitrage Efficiency 35mentioning

confidence: 99%

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Draper¹,

Fung²

2001

Journal of Futures Markets

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Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE-100 Index futures and the FTSE-100 European index options contracts. This study uses the put-call-futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time-stamped transaction data. This study allows for realistic trading and market-impact costs. The feasibility of strategies such as execute-and-hold and early unwinding is Index options (ESX) eliminate the possibility of early exercise in the option leg of the arbitrage portfolio.This study uses time-stamped bid-ask quotes and traded prices for both contracts. The data permit the matching of traded prices within narrow time intervals of 1 min. This reduces the nonsynchronous price problem. We allow for trading and market-impact costs, with market-impact costs determined from bid-ask quotes. The feasibility of execute-andhold and early-unwinding strategies is examined with ex-post and ex-ante simulation tests. This study also examines whether there is any significant intraday variation in the pattern of the distribution of mispricings. The ex-ante simulations allow for possible execution time lags in establishing each leg of the arbitrage trade. The relationship between arbitrage profit and spread costs, time to maturity, types of strategies adopted, and market volatility (as implied by the futures and options prices) is also examined.This study reveals that the occurrence of matched put-call-futures trios exhibits a U-shaped intraday pattern, with concentrations at both open and close. The magnitude of the observed mispricings, however, has no discernible intraday pattern. 4 This study finds ex-post arbitrage profits for traders facing transaction costs are limited and generally are rapidly extinguished in less than 3 min. Profits are larger the greater the spread, volatility, and time to maturity are, but the average ex-post profit is very close to the ex-ante profit for lags of less than 3 min. Long-futures trades are marginally more profitable than short-futures strategies. Early unwinding may also be profitable, but for traders facing even low levels of transaction costs, the number of opportunities is small.The results provide important confirmation for the results derived by Lee and Nayar (1993) and Fung and Chan (1994) for the Standard and Poor's (S&P) 500 and by Fung and Fung (1997a) for the Hong Kong Hang Seng Index. All three markets exhibit market efficiency and are consistent with the conclusions of Fleming, Ostdiek, and Whaley (1996), who found that traders p...

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The intraday pricing efficiency of Hong Kong Hang Seng Index options and futures markets

Cited by 27 publications

References 8 publications

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

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

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

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

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