American futures options arbitrage: evidence from the Nikkei 225 options market |
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Authors: | Changyun Wang Wei Zhang Weng Kit Tan |
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Institution: | 1. School of Finance, Renmin University of China , Haidian District , Beijing, 100872, P.R. China wangcy@sfruc.edu.cn;3. Department of Research and Model Development , Office of Federal Housing Enterprise Oversight , Washington, DC, 20552, USA;4. Department of Economics , National University of Singapore , Republic of Singapore |
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Abstract: | 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. |
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Keywords: | Futures options Nikkei 225 index futures Bid–ask price Arbitrage profitability |
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