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

Article


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.
Article Title

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

ERA Journal ID18552
Article CategoryArticle
Authors
AuthorHoque, Ariful
Journal TitleInternational Research Journal of Finance and Economics
Number of Pages9
Year2010
Place of PublicationLondon, United Kingdom
ISSN1450-2887
Web Address (URL)http://www.eurojournals.com/irjfe_43_09.pdf
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.

Keywordsput-call parity; transaction costs; omitted variable; serial correlation;, ARCH
ANZSRC Field of Research 2020350203. Financial econometrics
380110. International economics
380202. Econometric and statistical methods
Byline AffiliationsSchool of Accounting, Economics and Finance
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