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Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

Deville, Laurent; Riva, Fabrice (2007), Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach, Review of Finance / European Finance Review, 11, 3, p. 497-525. 10.1093/rof/rfm021

Type
Article accepté pour publication ou publié
Date
2007
Journal name
Review of Finance / European Finance Review
Volume
11
Number
3
Pages
497-525
Publication identifier
10.1093/rof/rfm021
Metadata
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Author(s)
Deville, Laurent
Groupe de Recherche en Droit, Economie et Gestion [GREDEG]
Riva, Fabrice
Dauphine Recherches en Management [DRM]
Abstract (EN)
This paper examines the determinants of the time it takes for an index options market toreturn to no arbitrage values after put-call parity deviations, using intraday transactions datafrom the French index options market. We employ survival analysis to characterize howlimits to arbitrage influence the expected duration of arbitrage deviations. After controllingfor conventional limits to arbitrage, we show that liquidity-linked variables are associatedwith a faster reversion of arbitrage profits. The introduction of an ETF also affects thesurvival rates of deviations but this impact essentially stems from the reduction in the levelof potential arbitrage profits.
Subjects / Keywords
distribution; microstructure Derivatives; market
JEL
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
D53 - Financial Markets

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