Non-simultaneity and Apparent Option Mispricing in Tests of Put-Call Parity

Abstract

Transaction costs have been offered as the most likely explanation for apparent mispricing found in recent studies of the Australian options market. This paper suggests that another feature of the market, namely non-simultaneity between option prices and the price of the underlying share, offers a more powerful explanation. It is demonstrated that the types of violations of put-call parity that have been observed in Australia are the types of violations that are to be expected when non-simultaneity is present. It is shown that apparent mispricing in tests of put-call parity will, in the presence of non-simultaneity, be greater for short-term options. Conversely, mispricing will be less for options which are at-the-money, and when the risk-free rate of interest is high. Non-simultaneity is likely to result in put options appearing to be undervalued relative to call options and the underlying share.

Keywords

OPTION PRICING NON-SIMULTANEITY ARBITRAGE OPPORTUNITIES

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