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Liquidity and Arbitrage in Options Markets: A SurvivalAnalysis Approach

Author

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  • Laurent Deville

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Fabrice Riva

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper examines the determinants of the time it takes for an index options market to return to no arbitrage values after put-call parity deviations, using intraday transactions data from the French index options market. We employ survival analysis to characterize how limits to arbitrage influence the expected duration of arbitrage deviations. After controlling for conventional limits to arbitrage, we show that liquidity-linked variables are associated with a faster reversion of arbitrage profits. The introduction of an ETF also affects the survival rates of deviations but this impact essentially stems from the reduction in the level of potential arbitrage profits.

Suggested Citation

  • Laurent Deville & Fabrice Riva, 2007. "Liquidity and Arbitrage in Options Markets: A SurvivalAnalysis Approach," Post-Print halshs-00162221, HAL.
    • Handle: RePEc:hal:journl:halshs-00162221
    DOI: 10.1093/rof/rfm021
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00162221
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    References listed on IDEAS

    as
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    Cited by:

    1. Efstathios Panayi & Gareth Peters, 2014. "Survival Models for the Duration of Bid-Ask Spread Deviations," Papers 1406.5487, arXiv.org.
    2. Beata Bieszk-Stolorz & Krzysztof Dmytrów, 2021. "Evaluation of Changes on World Stock Exchanges in Connection with the SARS-CoV-2 Pandemic. Survival Analysis Methods," Risks, MDPI, vol. 9(7), pages 1-19, June.
    3. François-Heude, Alain & Yousfi, Ouidad, 2013. "On the liquidity of CAC 40 index options Market," MPRA Paper 47921, University Library of Munich, Germany, revised 01 Jul 2013.
    4. Thierry Foucault & Roman Kozhan & Wing Wah Tham, 2017. "Toxic Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1053-1094.
    5. F. Riva & A. Calamia & L. Deville, 2013. "Liquidity in European equity ETFs: What really matters?," Post-Print hal-00846610, HAL.
    6. Jimmy E. Hilliard & Jitka Hilliard, 2017. "Option pricing under short-lived arbitrage: theory and tests," Quantitative Finance, Taylor & Francis Journals, vol. 17(11), pages 1661-1681, November.
    7. Kilian R. Dinkelaker & Andreas-Walter Mattig & Stefan Morkoetter, 2019. "A Closer Look at Credt Rating Processes: Uncovering the Impact of Analyst Rotation," Working Papers on Finance 1911, University of St. Gallen, School of Finance.
    8. David E. Rappoport & Tugkan Tuzun, 2020. "Arbitrage and Liquidity: Evidence from a Panel of Exchange Traded Funds," Finance and Economics Discussion Series 2020-097, Board of Governors of the Federal Reserve System (U.S.).
    9. Atanasova, Christina & Li, Mingxin, 2018. "Multi-market trading and liquidity: Evidence from cross-listed companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 117-138.
    10. Khan, Haris & Shehzad, Choudhry Tanveer & Ahmad, Ferhana, 2021. "Temporal effects of financial globalization on income inequality," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 452-467.
    11. Yang-Ho Park, 2019. "Variance Disparity and Market Frictions," Finance and Economics Discussion Series 2019-059, Board of Governors of the Federal Reserve System (U.S.).
    12. Chen, Hong-Yi & Hsieh, Chia-Hsun & Lee, Cheng-Few, 2023. "Revisiting the momentum effect in Taiwan: The role of persistency," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    13. Palani-Rajan Kadapakkam & Umesh Kumar, 2009. "Impact of Liquidity on the Futures–Cash Basis: Evidence from the Indian Market," Working Papers 0094, College of Business, University of Texas at San Antonio.
    14. Alain François-Heude & Ouidad Yousfi, 2014. "On the liquidity of CAC 40 index options market," Post-Print hal-02050806, HAL.
    15. Livingston, Miles & Wu, Yanbin & Zhou, Lei, 2019. "The decline in idiosyncratic values of US Treasury securities," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    16. Hong‐Yi Chen & Pin‐Huang Chou & Chia‐Hsun Hsieh, 2018. "Persistency of the momentum effect," European Financial Management, European Financial Management Association, vol. 24(5), pages 856-892, November.
    17. 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.
    18. Park, Yang-Ho, 2020. "Variance disparity and market frictions," Journal of Econometrics, Elsevier, vol. 214(2), pages 326-348.
    19. Beata Bieszk-Stolorz & Krzysztof Dmytrów, 2021. "A survival analysis in the assessment of the influence of the SARS-CoV-2 pandemic on the probability and intensity of decline in the value of stock indices," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 363-379, June.
    20. Brettschneider, Julia & Burro, Giovanni & Henderson, Vicky, 2021. "Wide framing disposition effect: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 330-347.

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