Abstract
Although SET50 Index Options, the only option product on Thailand Futures Exchange, has been traded since October 29, 2007, it has faced the liquidity problem. The SET50 Index Options market must offer a risk premium to compensate investors for liquidity risk. It may cause violations in options pricing relationships. This research therefore uses daily data from October 29, 2007 to December 30, 2016 to compare the violations in SET50 Index Options pricing relationships before and after change in contract specification on October 29, 2012 and investigate determinants of these violations using Tobit model. Two tests of SET50 Index Options pricing relationships, Put-Call-Futures Parity and Box Spread, are employed. The test results of Put-Call-Futures Parity show that the percentage and baht amount of violations in many cases are greater in the period before the modification of SET50 Index Options. Without transaction costs, we also see more Box Spread violations before contract adjustment. However, after taking transaction costs into account, there are more percentage and baht amount of Box Spread violations in the later time period. The estimation of Tobit model shows that the violation sizes of both Put-Call-Futures Parity and Box Spread, excluding transaction costs, depend on the liquidity of SET50 Index Options market measured by option moneyness and open interest. The SET50 Index Options contract specification, especially exercise price, also significantly affects the size of violations, though the direction of a relationship is not cleared.
Highlights
In recent years, Thailand Futures Exchange (TFEX), under the Stock Exchange of Thailand group, has continuously been developed its products and generated more liquidity to meet market demand
This paper compares the violations of some well-known arbitrage pricing relationships, Put-Call-Futures Parity and Box Spread, before and after the adjustment of SET50 Index Options contract on October 29, 2012 and examines the determinants of the size of violations in SET50 Index Options pricing relationships
The closing prices are used in scenario 1 when ignoring transaction costs
Summary
Thailand Futures Exchange (TFEX), under the Stock Exchange of Thailand group, has continuously been developed its products and generated more liquidity to meet market demand. Kamara and Miller (1995) use the dollar violation of arbitrage condition based on Put-Call Parity to determine the impact of liquidity on S&P 500 Index Options pricing relationships. The deviations from arbitrage relationships may reflect a liquidity risk premium as discussed in previous studies (e.g., Kamara & Miller, 1995; Ackert & Tian, 2001; Misra & Misra, 2005; Vipul, 2006; Dixit, Yadav, & Jain, 2011; Mohanti & Priyan, 2013). They show that variations in the deviations from Put-Call Parity are systematically related to proxies for liquidity risk in the stock and option markets. The findings are reported in the forth section, and the last section concludes the paper
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