Efficiency of the foreign currency options market

Article

Hoque, Ariful, Chan, Felix and Manzur, Meher. 2008. "Efficiency of the foreign currency options market." Global Finance Journal. 19 (2), pp. 157-170. https://doi.org/10.1016/j.gfj.2008.02.002
Article Title

Efficiency of the foreign currency options market

ERA Journal ID18372
Article CategoryArticle
AuthorsHoque, Ariful (Author), Chan, Felix (Author) and Manzur, Meher (Author)
Journal TitleGlobal Finance Journal
Journal Citation19 (2), pp. 157-170
Number of Pages14
Year2008
PublisherElsevier
Place of PublicationAmsterdam, Netherlands
ISSN1044-0283
1873-5665
Digital Object Identifier (DOI)https://doi.org/10.1016/j.gfj.2008.02.002
Web Address (URL)http://www.elsevier.com/locate/gfj
Abstract

This paper provides a new test of the efficiency of the currency option markets for four major currencies-British Pound, Euro, Swiss Frank and Japanese Yen vis-a-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no-arbitrage condition of put–call parity (PCP) holds in a trading environment. Augmented Dickey–Fuller and Philips–Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.

Keywordsforeign currency options; lower boundary conditions; put–call parity; conditional variance; transaction costs
ANZSRC Field of Research 2020350202. Finance
350208. Investment and risk management
380302. Macroeconomic theory
Public Notes

© 2008 Elsevier Inc. Permanent restricted access to published version due to publisher copyright policy. Author's version deposited in accordance with the copyright policy of the publisher.

Byline AffiliationsCurtin University of Technology
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