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Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market
Author(s) -
Fung Joseph K. W.,
Mok Henry M. K.,
Wong Kenneth C. K.
Publication year - 2004
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.0732-8516.2004.00083.x
Subject(s) - arbitrage , index (typography) , hang , financial economics , business , database transaction , economics , tick size , monetary economics , mechanical engineering , world wide web , computer science , engineering , programming language , market liquidity
Using a box spread arbitrage strategy, we examine the pricing efficiency of the emerging, thinly traded Hang Seng Index options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick‐by‐tick bid‐ask and transaction quotes we find very few arbitrage opportunities. Our examination of the reporting time of quotes shows that in effect, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities supports the pricing rationality hypothesis in the Hong Kong options market.