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An Option Theoretic Approach To Market Efficiency

Author

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  • RAJEEV R. BHATTACHARYA

    (Johns Hopkins University, Washington Finance and Economics, 1717 Massachusetts Avenue, Washington, DC 20036, USA)

Abstract

I use five separate measures of deviation from Put-Call Parity of options on a stock without splits or dividends as separate negative measures for market efficiency. I rely upon the theory of trading volume as a function of short sales costs, etc., and that of market efficiency as a function of trading volume, etc. derived by Bhattacharya (2019). I use Three-Stage Least Squares (3SLS) to estimate this structural system, separately for Nasdaq and non-Nasdaq U.S. stocks. I find, contrary to much previous theoretical and empirical work, that the impact of short sales costs & constraints on market efficiency is not significantly negative and that the impact of trading volume on market efficiency is not significantly positive, and my results are robust to various econometric specifications and financial economic assumptions.

Suggested Citation

  • Rajeev R. Bhattacharya, 2019. "An Option Theoretic Approach To Market Efficiency," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 1-21, December.
    • Handle: RePEc:wsi:afexxx:v:14:y:2019:i:04:n:s2010495219500180
    DOI: 10.1142/S2010495219500180
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    Cited by:

    1. Tai-Yuen Hon & Massoud Moslehpour & Kai-Yin Woo, 2021. "Review on Behavioral Finance with Empirical Evidence," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 15-41, December.

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