The Arbitrage Efficiency of the Nikkei 225 Options Market: A Put-Call Parity Analysis

This paper is concerned with arbitrage efficiency of the Nikkei index option contracts traded on the Osaka Securities Exchange ( OSE) within the put-call parity (PCP) framework. A thorough ex post analysis is first carried out. The results reveal a modest number of violations with 2.74 percent of the sample breaching the PCP equation and an average arbitrage profit of 22.61 index points for OSE member firms during the sample period (2003?05). Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched put and call contracts, are executed with lags of one minute and three minutes. The ex ante results reveal that the number of profitable arbitrage opportunities and the average profit are both reduced significantly with an execution lag. In addition, regression analysis is used to provide further evidence about the PCP and arbitrage profitability. Overall, there is no strong evidence found against the efficiency of the Nikkei 225 options market, although arbitrage opportunities do exist occasionally.Put-call parity; Market efficiency; Nikkei 225 options

The Introduction of the CAC40 Master Unit and the CAC40 Index Spot-Futures Pricing Relationship.

Efficiency; Arbitrage; Futures; ETF;

The Mirage of Triangular Arbitrage in the Spot Foreign Exchange Market

We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency

The Self-Financing Equation in High Frequency Markets

High Frequency Trading (HFT) represents an ever growing proportion of all financial transactions as most markets have now switched to electronic order book systems. The main goal of the paper is to propose continuous time equations which generalize the self-financing relationships of frictionless markets to electronic markets with limit order books. We use NASDAQ ITCH data to identify significant empirical features such as price impact and recovery, rough paths of inventories and vanishing bid-ask spreads. Starting from these features, we identify microscopic identities holding on the trade clock, and through a diffusion limit argument, derive continuous time equations which provide a macroscopic description of properties of the order book. These equations naturally differentiate between trading via limit and market orders. We give several applications (including hedging European options with limit orders, market maker optimal spread choice, and toxicity indexes) to illustrate their impact and how they can be used to the benefit of Low Frequency Traders (LFTs)

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

This paper investigates arbitrage opportunities from the Australian market using the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. A thorough ex post analysis is first carried out. Tick-by-tick transaction price data allow the futures contracts, the call futures options and the put futures options to be matched within a one minute interval. This paper take into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. The results reveal a significant number of violations with 25.40% of the sample breaching the PCFP equation with an average profit of 6.733 index points for SFE member firms. Ex ante tests are also conducted whereby the trios that signified an ex post profit for members were lagged up to 3 minutes before being executed. The results were similar to the ex post results casting doubt on the efficiency and integration between these two derivative markets in Australia.

The Rise of Computerized High Frequency Trading: Use and Controversy

Over the last decade, there has been a dramatic shift in how securities are traded in the capital markets. Utilizing supercomputers and complex algorithms that pick up on breaking news, company/stock/economic information and price and volume movements, many institutions now make trades in a matter of microseconds, through a practice known as high frequency trading. Today, high frequency traders have virtually phased out the dinosaur floor-traders and average investors of the past. With the recent attempted robbery of one of these high frequency trading platforms from Goldman Sachs this past summer, this rise of the machines has become front page news, generating vast controversy and discourse over this largely secretive and ultra-lucrative practice. Because of this phenomenon, those of us on Main Street are faced with a variety of questions: What exactly is high frequency trading? How does it work? How long has this been going on for? Should it be banned or curtailed? What is the end-game, and how will this shape the future of securities trading and its regulation? This iBrief explores the answers to these questions