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

Kelvin Wai Lung Lai, Andrew Marshall

Research output: Contribution to journalArticlepeer-review


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.
Original languageEnglish
Pages (from-to)373-394
Number of pages21
JournalReview of Pacific Basin Financial Markets and Policies
Issue number3
Publication statusPublished - Sep 2002


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


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