Price discovery in the options markets: An application of put-call parity

Wen-liang Hsieh, Chin Shen Lee, Shu Fang Yuan

Research output: Contribution to journalArticle

17 Scopus citations

Abstract

This study investigates the relative rate of price discovery in Taiwan between index futures and index options, proposing a put-call parity (PCP) approach to recover the spot index embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Consistent with the trading-cost hypothesis, a dominant tendency is found for futures and a subordinate but non-trivial price discovery from options. The relative weight of options price discovery is sensitive to the methodology employed as the means of inferring the option-implicit spot price. The empirical evidence suggests that the information contained in the PCP-implied spot encompasses that provided by the Black-Scholes-implied spot.

Original languageEnglish
Pages (from-to)354-375
Number of pages22
JournalJournal of Futures Markets
Volume28
Issue number4
DOIs
StatePublished - 1 Apr 2008

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