Deviations from Put-Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market

Chin Ho Chen*, Huimin Chung, Shu Fang Yuan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This study examines whether deviations from put-call parity are informative about future volatility in the underlying index. Using the difference in implied volatility between call and put options to measure these deviations, we find that deviations from put-call parity predict future volatility. The predictability becomes stronger as option liquidity increases and the liquidity of the underlying index decreases. The results for volatility prediction remain significant even after controlling for implied volatility, information shocks, other information variables on return and volatility used widely in the literature, and short sales constraints. In addition, our results also show that deviations from put-call parity contain information about the future trading volume of options and the underlying index.

Original languageEnglish
Pages (from-to)1122-1145
Number of pages24
JournalJournal of Futures Markets
Volume34
Issue number12
DOIs
StatePublished - 1 Dec 2014

Fingerprint Dive into the research topics of 'Deviations from Put-Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market'. Together they form a unique fingerprint.

Cite this