TITLE:
Put-Call Parity in Equity Options Markets: Recent Evidence
AUTHORS:
Timothy A. Krause
KEYWORDS:
Options, Put-Call Parity, Excess Returns, Nonsynchronous Trading
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.4,
March
26,
2019
ABSTRACT: There have been various studies of potential violations
of put-call parity in US equity options markets, and the purpose of this study
is to examine one potential explanation of these anomalous results. Cremers and
Weinbaum [1] indicate a potential trading strategy that can obtain excess
returns of up to 50 basis points per week, which is quite remarkable. However,
none of these studies consider the fact that options markets have historically
maintained different trading hours than those of their underlying security
markets. While the US stock market has traditionally closed at 3:00 PM CST,
options markets have variously closed between 3:10 and 3:02 PM CST over the past
two decades. Using over ten million individual options implied volatility
estimations since 1996, it is documented that these anomalies have all but
disappeared since stock and option markets synchronized their trading hours.
Beginning in the late 1990’s, stock prices often move slightly or to a larger
degree in “after-hours” trading, enabled by the advent of electronic trading
platforms. Options markets that are still open may adjust to subsequent stock
market movements, although closing stock prices are reported as of 3:00 PM CST.
Prior studies may have ignored these effects, and this is the first study to
indicate that apparent deviations from put-call parity have decreased markedly
over recent years, if they were ever economically significant at all.