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

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  • Joseph K. W. Fung
  • Henry M. K. Mok
  • Kenneth C. K. Wong

Abstract

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.

Suggested Citation

  • Joseph K. W. Fung & Henry M. K. Mok & Kenneth C. K. Wong, 2004. "Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market," The Financial Review, Eastern Finance Association, vol. 39(3), pages 435-454, August.
    • Handle: RePEc:bla:finrev:v:39:y:2004:i:3:p:435-454
    DOI: 10.1111/j.0732-8516.2004.00083.x
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    References listed on IDEAS

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