Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia.      

EARLY UNWINDING STRATEGY IN INDEX OPTIONS-FUTURES ARBITRAGE

We first re-examine buy-and-hold arbitrage strategies using both ex-post and ex-ante index options and futures data in Hong Kong. The results show that the arbitrage profit is not large enough to cover the transaction costs for both individual and institutional investors. Second, we find that, when an early unwinding strategy is employed, the arbitrage profit improves significantly under ex-post analysis but only improves slightly under ex-ante analysis. In addition, opportunities for same-day unwinding are limited. Finally, our regression results indicate the magnitude of the arbitrage profit is positively related to the volatility of the stock market.     

Why Option Prices Lag Stock Prices: A Trading-based Explanation

While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.     

American futures options arbitrage: evidence from the Nikkei 225 options market

Previous studies have examined the profitability of European index options arbitrage. This paper adds to the literature by investigating the arbitrage profitability of American index options—the Nikkei 225 index futures options traded on the Singapore Stock Exchange (SGX). Using the real-time bid–ask prices, we find evidence of profitable arbitrage opportunities, while the frequency of observations violating no-arbitrage bounds and the magnitude of arbitrage profits decrease with the level of transaction costs. Our results have implications for the analysis of American options market efficiency. Failure to use bid–ask prices may lead to biased conclusions.     

Volatility timing,sentiment, and the short-term profitability of VIX-based cross-sectional trading strategies

This paper explores the profitability of simple short-term cross-sectional trading strategies based on the implied volatility index (VIX), often referred to as an “investor fear gauge” in the stock market. These strategies involve holding sentiment-prone stocks when VIX is low and sentiment-immune stocks when VIX is high and generate significantly higher excess returns than the benchmark long–short portfolios that do not condition on VIX. We show that the profitability of our trading strategies is not subsumed by the well-known risk factors or transaction cost adjustments. Our findings are consistent with the theory of delayed arbitrage and the synchronization problem of Abreu and Brunnermeier (2002).     

Shorting costs and profitability of long–short strategies

We examine how the profitability of long–short arbitrage strategies based on anomalies is affected after adjustment for two shorting costs: implicit cost due to unavailability of stocks in the short-leg to sell short and loan fees actually paid to stock lenders. The combined shorting cost amounts to almost 40 percent of long–short gross returns over the sample period from January 2006 to December 2017. After adjustment for these shorting costs, long–short arbitrage profits are thus reduced by almost 40 percent. Even after adjustment for risk, the proportion of shorting costs is also substantial. If other trade-related transaction costs are considered, long–short arbitrage profits would be reduced further. Our results provide explicit evidence that casts doubt on the profitability of long-short arbitrage strategies based on anomalies.     

Costly arbitrage and idiosyncratic risk: Evidence from short sellers

Previous studies have shown that high short interest stocks have low subsequent returns. We test whether the persistence of this effect is due to costs limiting arbitrage. The arbitrage cost that we focus on is idiosyncratic risk which, regardless of the arbitrageur’s level of diversification, deters arbitrage activity. Consistent with costly arbitrage, we find that among high short interest stocks a one standard deviation increase in idiosyncratic risk predicts a more than 1% decline in monthly returns. Moreover, idiosyncratic risk does not predict returns across low short interest stocks, and short interest does not predict low returns across low idiosyncratic risk stocks. Our results are robust to commonly used proxies for both transaction costs and short sale constraints.     

模糊厌恶下股指期货风险对冲策略设计及实证分析

投资者对股指期货与现货有着不同的模糊厌恶,本文首先将此假设条件引入带交易成本的Garleanu and Pederson (2013)投资模型中,并以指数基金对冲策略为例,构建了一个股指期货动态对冲的理论模型。与非对冲策略相比,基于上述模型设计的对冲策略投资绩效更好,动态最优成交额占目标交易额的比例更小,目标成交额对收益率预测因子的敏感性更大。借助上述模型,本文选取2010年4月至2021年6月的中国ETF指数基金和股指期货数据,并以2015年9月股指期货管理措施实施为界进行区间划分,实证研究发现:(1)中国A股市场的ETF投资组合进行股指期货对冲显著提升了投资绩效,但股指期货管理会削弱该作用;(2)投资绩效改善主要来源于交易成本的下降与目标成交额因子敏感性的提升,该机制受到股指期货管理的约束;(3)与Garleanu and Pederson (2013)、Zhang et al. (2017)相比,本文对冲策略保留“抗跌”特点的同时增加了“易涨”特性。本文研究结果表明,在当前大力发展机构投资者的背景下应不断丰富股指期货、股指期权产品谱系,降低股指期货交易成本并完善持仓约束。     

Characteristics of Risk and Return in Risk Arbitrage

This paper analyzes 4,750 mergers from 1963 to 1998 to characterize the risk and return in risk arbitrage. Results indicate that risk arbitrage returns are positively correlated with market returns in severely depreciating markets but uncorrelated with market returns in flat and appreciating markets. This suggests that returns to risk arbitrage are similar to those obtained from selling uncovered index put options. Using a contingent claims analysis that controls for the nonlinear relationship with market returns, and after controlling for transaction costs, we find that risk arbitrage generates excess returns of four percent per year.     

The effects of newly listed derivatives in a thin stock market

This study examines the informational feedback effects associated to the listing and trading of derivatives in Switzerland. The observed changes in the price and higher moments of stock returns are representative of a thin stock market. The listing of stock options and index futures generated positive abnormal returns for large stocks and for the index while small stocks essentially benefited from the launching of index options. While reducing the variance of blue chips and of the index, their variance's stochasticity increased (decreased) at index options' (futures) listings. Finally, we detect significant stock and index derivatives' price leads which do not however generate arbitrage opportunities.     

Intraday indirect arbitrage between European index ETFs

We investigate intraday arbitrage between close substitute Exchange-traded Funds (ETFs) on two major European indices: FTSE100 and DAX30. Using intraday data, we establish arbitrage links between our ETFs through cointegration and error correction models. We then apply an arbitrage identification procedure on approximately 18 million intraday matched quotes, resulting in 1.95% and 0.2% of observations on the ETF pairs for FTSE100 and DAX30 as arbitrage opportunities. They occur on specific days in our sample, disappear relatively quickly, and result in economically insignificant profits from arbitrage trades within the mispricing window, indicating overall price efficiency.     

Can we forecast the implied volatility surface dynamics of equity options? Predictability and economic value tests

We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that the dynamics of the implied volatility surface of individual stocks may be associated with movements in the volatility surface of S&P 500 index options. We present evidence of strong predictable features in the cross-section of equity options and of dynamic linkages between the volatility surfaces of equity and S&P 500 index options. Moreover, time-variation in stock option volatility surfaces is best predicted by incorporating information from the dynamics in the surface of S&P 500 options. We analyze the economic value of such dynamic patterns using strategies that trade straddle and delta-hedged portfolios, and find that before transaction costs such strategies produce abnormal risk-adjusted returns.     

Investor Sentiment and the Cross-Section of Stock Returns

We study how investor sentiment affects the cross‐section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning‐of‐period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non‐dividend‐paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these categories of stock earn relatively low subsequent returns.     

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

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.     

Short Sales Constraints and Momentum in Stock Returns

Abstract:   We show that stock characteristics identified by D'Avolio (2002) provide a reliable index of the mostly unobservable short sales constraints. Specifically, we find that this index is positively related to the level of short interest and to short selling costs implied by the disparity in prices in the options and stock markets, and is negatively related to future returns. Using this index, we show that the magnitude of momentum returns for the period 1984 to 2001 is positively related to short sales constraints, and loser stocks rather than winner stocks drive this result. We conclude that short sales constraints are important in preventing arbitrage of momentum in stock returns.     

Mean-reversion properties of implied volatilities

In this paper, we present a new stylized fact for options whose underlying asset is a stock index. Extracting implied volatility time series from call and put options on the Deutscher Aktien index (DAX) and financial times stock exchange index (FTSE), we show that the persistence of these volatilities depends on the moneyness of the options used for its computation. Using a functional autoregressive model, we show that this effect is statistically significant. Surprisingly, we show that the diffusion-based stochastic volatility models are not consistent with this stylized fact. Finally, we argue that adding jumps to a diffusion-based volatility model help recovering this volatility pattern. This suggests that the persistence of implied volatilities can be related to the tails of the underlying volatility process: this corroborates the intuition that the liquidity of the options across moneynesses introduces an additional risk factor to the one usually considered.     

Arbitraging American Gold Spot and Futures Options

This study empirically tests rational pricing conditions applicable to American gold spot and futures options. A number of ancillary pricing relations also are tested. Transactions data supplied by the Montreal Stock Exchange and the New York Commodity Exchange are used in these tests. Arbitrage trading strategies designed to exploit violations of these conditions also are provided. The results indicate potential intermarket inefficiency: a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.     

Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation

This paper reviews and extends the existing literature on covered arbitrage, delineates the conditions for profitable arbitrage with the hedging instruments of forward and options contracts in the foreign exchange markets, and defines the maximum possible profits out of a given market environment. Next, the simple rules on speculation are articulated with and without transaction costs, and then we show how speculation can be covered with options and forwards. Finally, speculation is integrated with arbitrage and hedging, and further compounding of profit possibilities is illustrated.     

Stock index futures arbitrage in emerging markets: Polish evidence

The efficiency of the market for stock index futures and profitability of arbitrage for contracts on the Warsaw Stock Exchange Index WIG20 is studied in this paper. The Polish market has unique attributes: in a relatively short time the risk-free interest rate has decreased significantly, short sale cannot be used to construct an arbitrage position by institutional investors, and the dividends are small and paid in an irregular manner. Examining intraday transaction data shows that ex post and ex ante violations for short arbitrage reveal almost all properties of a mature market. Nonetheless, findings for long arbitrage indicate inefficiency of the market.     

Beating the DAX,MDAX, and SDAX: investment strategies in Germany

Motivated by two recent papers of Asness et al. (J Portf Manag Fall 40(5):75–92, 2014; J Portf Manag Fall 42(1):34–52, 2015), we investigate whether momentum and value strategies outperformed a buy-and-hold strategy in the three biggest German equity indices, DAX, MDAX, and SDAX from 1988 to 2015. Our findings show that a momentum premium was present only in the SDAX and that value strategies did not work in any of the three indices. Consequently, we conclude that at least the DAX and MDAX are efficient indices and that some supposedly abnormal returns could be illusionary, as limits to arbitrage obstruct any profitable exploitation in practice. Finally, we find a negative correlation between momentum and value in the DAX and show that mixing both strategies can substantially decrease a portfolio’s risk.