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Lower-boundary violations and market efficiency: Evidence from the German DAX-index options market

✍ Scribed by Mittnik, Stefan; Rieken, Sascha

Publisher: John Wiley and Sons
Year: 2000
Tongue: English
Weight: 319 KB
Volume: 20
Category: Article
ISSN: 0270-7314
DOI: 10.1002/(sici)1096-9934(200005)20:5<405::aid-fut1>3.0.co;2-5

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✦ Synopsis

The informational efficiency of the market for options on the German stock index DAX is examined using intraday transactions data. Problems of previous studies on options-market efficiency, arising from dividend estimation and the early-exercise effect, are avoided, because the DAX is a performance index and DAX options are European options. Ex-post and ex-ante tests are carried out to simulate trading strategies that exploit irrational lower-boundary violations of observed option prices. Because the lower-boundary conditions are solely based on arbitrage considerations, the test results do not depend on the assumption that investors use a particular option-pricing model. The investigation shows that ex-post profits are, in general, dramatically reduced when the execution of arbitrage strategies is delayed and/or transaction costs are accounted for. However, arbitrage restrictions, *

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