Econometric modeling for transaction cost-adjusted put-call parity: evidence from the currency options market

Hoque, Ariful (2010) Econometric modeling for transaction cost-adjusted put-call parity: evidence from the currency options market. International Research Journal of Finance and Economics (43). pp. 119-127. ISSN 1450-2887

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Abstract

Due to the mispricing of options, no-arbitrage condition put-call parity (PCP) violations lead to inefficiency in the currency options market. Through transaction costs, the effects of these violations are reduced to negligible levels, indicating that PCP is not a sufficient condition for an options market efficiency test. Thus, this study developed a transaction cost-adjusted put-call parity (TC-Adj-PCP) econometric model to examine the efficiency of options markets. The fundamental analysis of the proposed model concludes that transaction costs represent an omitted variable for the PCP model, where the uniqueness of this variable is demonstrated under PCP in the context of options market efficiency. The novelty of the TC-Adj-PCP model resolves controversial transaction costs issues for traders and researchers.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Depositing User: Dr Ariful Hoque
Faculty / Department / School: Historic - Faculty of Business - School of Accounting, Economics and Finance
Date Deposited: 20 Oct 2010 07:53
Last Modified: 03 Jul 2013 00:03
Uncontrolled Keywords: put-call parity; transaction costs; omitted variable; serial correlation;, ARCH
Fields of Research (FOR2008): 15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150202 Financial Econometrics
14 Economics > 1402 Applied Economics > 140210 International Economics and International Finance
14 Economics > 1403 Econometrics > 140302 Econometric and Statistical Methods
Socio-Economic Objective (SEO2008): B Economic Development > 90 Commercial Services and Tourism > 9001 Financial Services > 900101 Finance Services
URI: http://eprints.usq.edu.au/id/eprint/8765

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