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The internal and cross market efficiency in index option markets: an investigation of the Italian market

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  • M. Brunetti
  • C. Torricelli

Abstract

The aim of the present paper is to provide evidence on the internal efficiency of the Italian index option market and to verify the consistency of the latter notion of efficiency with the cross market one. To this end a model-free approach is taken, whereby strategies involving only options are tested by means of a high frequency dataset. These strategies may provide a superior test of parity among index options since they do not involve the index replication issues and usefully complete previous studies which focused on cross-market efficiency only. The results obtained clearly support the efficiency of the Italian market and comparatively highlight a high level of consistency between internal and cross market efficiency.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:1:p:25-33
    DOI: 10.1080/09603100500461710
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    References listed on IDEAS

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    1. Evnine, Jeremy & Rudd, Andrew, 1985. "Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-756, July.
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    10. Billingsley, Randall S & Chance, Don M, 1985. "Options Market Efficiency and the Box Spread Strategy," The Financial Review, Eastern Finance Association, vol. 20(4), pages 287-301, November.
    11. Brunetti, Marianna & Torricelli, Costanza, 2005. "Put-call parity and cross-markets efficiency in the index options markets: evidence from the Italian market," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 508-532.
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    Cited by:

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    2. Ebenezer Asem & Vishaal Baulkaran & Rossitsa Yalamova & Xiaofei Zhang, 2017. "Internal Market Efficiency, Market Co-movement, and Cross-Market Efficiency: The Case of Hong Kong and Shanghai Stock Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 24(4), pages 253-267, December.
    3. Moriggia, V. & Muzzioli, S. & Torricelli, C., 2009. "On the no-arbitrage condition in option implied trees," European Journal of Operational Research, Elsevier, vol. 193(1), pages 212-221, February.
    4. Yueh-Neng Lin & Shih-Kuo Yeh & Shih-Ching Chuan & Steven J. Jordan, 2008. "The link between intraday signals and call warrant mispricing," The Service Industries Journal, Taylor & Francis Journals, vol. 30(13), pages 2273-2288, November.
    5. Massa, Massimo & Vermaelen, Theo & Xu, Moqi, 2013. "Rights offerings, trading, and regulation: a global perspective," LSE Research Online Documents on Economics 55403, London School of Economics and Political Science, LSE Library.
    6. 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).

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