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The Box Spread Arbitrage Conditions: Theory, Tests, and Investment Strategies

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  • Ronn, Aimee Gerbarg
  • Ronn, Ehud I

Abstract

This paper develops and tests arbitrage bounds for a combination of two option spread positions known as a box spread. This strategy involves the simultaneous use of four options and creates a position that is equivalent to riskless lending. The no-arbitrage conditions are compared to existing arbitrage bounds and are tested using Chicago Board Options Exchange data. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Ronn, Aimee Gerbarg & Ronn, Ehud I, 1989. "The Box Spread Arbitrage Conditions: Theory, Tests, and Investment Strategies," The Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 91-108.
    • Handle: RePEc:oup:rfinst:v:2:y:1989:i:1:p:91-108
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    Citations

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    Cited by:

    1. 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.
    2. 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).
    3. Cassese, Gianluca & Guidolin, Massimo, 2006. "Modelling the implied volatility surface: Does market efficiency matter?: An application to MIB30 index options," International Review of Financial Analysis, Elsevier, vol. 15(2), pages 145-178.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. van Binsbergen, Jules H. & Diamond, William F. & Grotteria, Marco, 2022. "Risk-free interest rates," Journal of Financial Economics, Elsevier, vol. 143(1), pages 1-29.
    6. M. Brunetti & C. Torricelli, 2007. "The internal and cross market efficiency in index option markets: an investigation of the Italian market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 25-33.
    7. Gianluca Cassesse & Massimo Guidolin, 2005. "Modelling the MIB30 implied volatility surface. Does market efficiency matter?," Working Papers 2005-008, Federal Reserve Bank of St. Louis.
    8. D. Matsypura & V.G. Timkovsky, 2013. "Integer programs for margining option portfolios by option spreads with more than four legs," Computational Management Science, Springer, vol. 10(1), pages 51-76, February.
    9. Fahlenbrach, Rüdiger & Sandås, Patrik, 2010. "Does information drive trading in option strategies?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2370-2385, October.
    10. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September.
    11. 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.
    12. Woradee Jongadsayakul, 2016. "A Box Spread Test of the SET50 Index Options Market Efficiency: Evidence from the Thailand Futures Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1744-1749.

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