Arbitrage opportunities, liquidity provision, and trader types in an index option market

This study examines the impact of arbitrage in put–call futures parity (PCFP) violations on option market liquidity and explores the liquidity provision process by trader type during periods of arbitrage exploitation. Using a unique data set comprising the complete history of transactions, we find t...

Full description

Saved in:
Bibliographic Details
Published inThe journal of futures markets Vol. 40; no. 3; pp. 279 - 307
Main Authors Chen, Chin‐Ho, Chiu, Junmao, Chung, Huimin
Format Journal Article
LanguageEnglish
Published Hoboken Wiley Periodicals Inc 01.03.2020
Subjects
Arbitrage
Exploitation
Liquidity
liquidity provision
put–call futures parity
Transactions
Violations
Online AccessGet full text

Cover

More Information
Summary:This study examines the impact of arbitrage in put–call futures parity (PCFP) violations on option market liquidity and explores the liquidity provision process by trader type during periods of arbitrage exploitation. Using a unique data set comprising the complete history of transactions, we find that PCFP violations contain toxic arbitrage opportunities. Hence, more frequent toxic arbitrage opportunities can cause liquidity to deteriorate because arbitrageurs create adverse selection costs and order imbalances in the option market. In addition, when the law of one price breaks down, market makers dominate by providing liquidity compared with individual, domestic, and foreign institutional traders.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
content type line 14
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22077