A study of mispricing and parity in the Hang Seng futures and options markets

Kelvin Wai Lung Lai, Andrew Marshall

Research output: Contribution to journalArticle

Abstract

This paper examines mispricing, volatility and parity on the Hang Seng Index (HSI) options and futures market. Most of the previous research has focused on futures contracts; we update this research and extend it by considering also option contracts. It is also important to examine these issues post 1997 Asian crisis. We find mispricing of HSI futures and option contracts if no transaction costs were considered. However, by incorporating transaction costs, the HSI futures are bounded within the arbitrage free region and most of the mispricing of the HSI options disappears. Additional tests on the mispricing series reveals that most of the derivative HSI contracts are positively autocorrelated and that the mispricing series for both derivative contracts are not identical among the different contract months. From our results we cannot conclude that there is causal relationship between the mispricing and the spot index volatility. Finally, our empirical results show that for HSI derivative contractsfuture and option parity holds, supporting our mispricing test that the HSI derivative market is efficient and has not been adversely affected by the Asian economic crisis.
LanguageEnglish
Pages373-394
Number of pages21
JournalReview of Pacific Basin Financial Markets and Policies
Volume5
Issue number3
DOIs
Publication statusPublished - Sep 2002

Fingerprint

Options markets
Parity
Mispricing
Derivatives
Index options
Option contract
Futures contracts
Transaction costs
Volatility index
Empirical results
Arbitrage
Derivative markets
Asian economic crisis
Asian crisis
Futures markets

Keywords

  • futures
  • options
  • index
  • mispricing
  • volatility
  • parity

Cite this

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A study of mispricing and parity in the Hang Seng futures and options markets. / Lai, Kelvin Wai Lung; Marshall, Andrew.

In: Review of Pacific Basin Financial Markets and Policies , Vol. 5, No. 3, 09.2002, p. 373-394.

Research output: Contribution to journalArticle

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