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Measuring Pricing Inefficiencies Under Stressful Market Conditions

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  • Louis Cheng
  • Jay White

Abstract

This study examines the mispricing and time between arbitrage trades of the Hong Kong Hang Seng index futures and index options contracts under various stressed market conditions. Ex‐ante trading profits and differences in time between trades across up and down as well as stressed and non‐stressed markets are used to measure how well the derivative markets perform under emotional distress. We find evidence of illiquidity in stressed and down markets. In stressful markets and down markets, liquidity suppliers are less likely to trade against the informed traders. This, in turn, leads to longer time between trades and higher arbitrage profits.

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  • Louis Cheng & Jay White, 2003. "Measuring Pricing Inefficiencies Under Stressful Market Conditions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 383-411, April.
    • Handle: RePEc:bla:jbfnac:v:30:y:2003:i:3-4:p:383-411
    DOI: 10.1111/1468-5957.t01-1-00002
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    1. Cheng, Louis T.W. & Leung, T.Y. & Yu, Wayne, 2014. "Information arrival, changes in R-square and pricing asymmetry of corporate news," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 67-81.
    2. Chen, Wei-Peng & Ling Lin, Shu & Lu, Jun & Wu, Chih-Chiang, 2018. "The impact of funding liquidity on market quality," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 153-166.
    3. Zhihua Zhang & Rose Neng Lai, 2006. "Pricing efficiency and arbitrage: Hong Kong derivatives markets revisited," Applied Financial Economics, Taylor & Francis Journals, vol. 16(16), pages 1185-1198.

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