Box Spread Pricing Efficiency in a Thin Market with Competitive Market Makers: A Study with Bid/ask Quotes and Transaction Data of Index Options

摘要

Using a box spread arbitrage strategy, we examine the pricing efficiency of index options in the emerging and thinly traded options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick-by-tick bid/ask quotes we find very few apparent arbitrage opportunities. A further examination of timing shows that effectively, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities provides compelling evidence of pricing rationality of the options market in Hong Kong.