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Put-Call Parity and Expected Returns

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  • Finucane, Thomas J.

Abstract

This study examines the hypothesis that in the presence of market frictions, relative put and call prices contain information concerning future returns of the underlying asset. A measure of relative prices is derived from the put-call parity relationship for index options and applied to a three-year sample of OEX option transactions. The results show that the measure of relative index option prices leads the stock market by at least 15 minutes.

Suggested Citation

  • Finucane, Thomas J., 1991. "Put-Call Parity and Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 445-457, December.
    • Handle: RePEc:cup:jfinqa:v:26:y:1991:i:04:p:445-457_00
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    Cited by:

    1. Jozef Barunik & Jiri Kukacka, 2015. "Realizing stock market crashes: stochastic cusp catastrophe model of returns under time-varying volatility," Quantitative Finance, Taylor & Francis Journals, vol. 15(6), pages 959-973, June.
    2. Kai-Li Wang & Mei-Ling Chen, 2007. "The dynamics in the spot, futures, and call options with basis asymmetries: an intraday analysis in a generalized multivariate GARCH-M MSKST framework," Review of Quantitative Finance and Accounting, Springer, vol. 29(4), pages 371-394, November.
    3. Hoque, Ariful & Le, Thi & Hasan, Morshadul & Abedin, Mohammad Zoynul, 2024. "Does market efficiency matter for Shanghai 50 ETF index options?," Research in International Business and Finance, Elsevier, vol. 67(PB).
    4. Nam, Seung Oh & Oh, SeungYoung & Kim, Hyun Kyung, 2008. "The time difference effect of a measurement unit in the lead-lag relationship analysis of Korean financial market," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 259-273.
    5. Ming-Yuan Leon Li & Chun-Nan Chen, 2010. "Examining the interrelation dynamics between option and stock markets using the Markov-switching vector error correction model," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(7), pages 1173-1191.
    6. Laurent Deville & Fabrice Riva, 2007. "Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach," Review of Finance, European Finance Association, vol. 11(3), pages 497-525.
    7. Muravyev, Dmitriy & Pearson, Neil D. & Paul Broussard, John, 2013. "Is there price discovery in equity options?," Journal of Financial Economics, Elsevier, vol. 107(2), pages 259-283.
    8. repec:dau:papers:123456789/2397 is not listed on IDEAS
    9. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    10. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2014. "Trading activity in the equity market and its contingent claims: An empirical investigation," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 13-35.
    11. Cohen, Ruben D, 2000. "The long-run behavior of the S&P Composite Price Index and its risk premium," MPRA Paper 3192, University Library of Munich, Germany.
    12. Sol Kim & Geul Lee, 2017. "Lead–Lag Relationship Between Returns and Implied Moments: Evidence from KOSPI 200 Intraday Options Data," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-20, September.
    13. Chiang, Raymond & Fong, Wai-Ming, 2001. "Relative informational efficiency of cash, futures, and options markets: The case of an emerging market," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 355-375, February.
    14. Lee, Jaeram & Kang, Jangkoo & Ryu, Doojin, 2015. "Common deviation and regime-dependent dynamics in the index derivatives markets," Pacific-Basin Finance Journal, Elsevier, vol. 33(C), pages 1-22.
    15. Michael Boluch & Trevor Chamberlain, 1997. "Option volume and stock price behavior: Some evidence from the Chicago board options exchange," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(4), pages 358-370, December.
    16. repec:dau:papers:123456789/2200 is not listed on IDEAS
    17. Ravi Kashyap, 2019. "Concepts, Components and Collections of Trading Strategies and Market Color," Papers 1910.02144, arXiv.org, revised Jan 2020.
    18. Lockwood, Jimmy & Lockwood, Larry & Miao, Hong & Ramchander, Sanjay & Yang, Dongxiao, 2022. "The information content of ETF options," Global Finance Journal, Elsevier, vol. 53(C).
    19. Bing Han & Gang Li, 2021. "Information Content of Aggregate Implied Volatility Spread," Management Science, INFORMS, vol. 67(2), pages 1249-1269, February.
    20. Barunik, J. & Vosvrda, M., 2009. "Can a stochastic cusp catastrophe model explain stock market crashes?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1824-1836, October.

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