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Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

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Date
2007
Dewey
Bourse, Marchés financiers
Sujet
distribution; microstructure Derivatives; market
JEL code
L.L1.L11; D.D5.D53
Journal issue
Review of Finance / European Finance Review
Volume
11
Number
3
Publication date
08-2007
Article pages
497-525
DOI
http://dx.doi.org/10.1093/rof/rfm021
URI
https://basepub.dauphine.fr/handle/123456789/19674
Collections
  • DRM : Publications
Metadata
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Author
Deville, Laurent
15896 Groupe de Recherche en Droit, Economie et Gestion [GREDEG]
Riva, Fabrice
1032 Dauphine Recherches en Management [DRM]
Type
Article accepté pour publication ou publié
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.

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