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Quote inefficiency in options markets

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  • Longarela, Iñaki R.
  • Mayoral, Silvia

Abstract

In an arbitrage-free economy with non-zero bid-ask spreads the existence of payoffs whose price is lower than the price of a dominated payoff cannot be discarded in general. However, when the former price corresponds to trivial portfolios which involve buying or selling one unit of the basis assets, its presence, although not an arbitrage, is a severe market anomaly which we refer to as an inefficient quote. In an empirical study, we report evidence that indicates that in options markets both the frequency and the magnitude of these anomalies are substantial and we document puzzling patterns in their behavior.

Suggested Citation

  • Longarela, Iñaki R. & Mayoral, Silvia, 2015. "Quote inefficiency in options markets," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 23-36.
    • Handle: RePEc:eee:jbfina:v:55:y:2015:i:c:p:23-36
    DOI: 10.1016/j.jbankfin.2014.11.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Inefficient quotes; Bid-ask spread; Law of one price; Index options;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G1 - Financial Economics - - General Financial Markets

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