Does market efficiency matter for Shanghai 50 ETF index options?

Abstract

This study aims to measure Shanghai 50 Exchange-Traded Fund (SSE 50 ETF) index options efficiency for trading in different periods of a trading day. We use an econometric model of put-call-parity to test the market efficiency for three moneyness situations: call at-the-money and put at-the-money, call in-the-money and put out-of-the-money, call out-of-the-money, and put in-the-money. The SSE 50 ETF index options market is efficient when both call and put options are at-the-money, leading to accurately-priced call and put options. The SSE 50 ETF index options market is inefficient if the call is in-the-money (out-of-the-money) and the put is out-of-the-money (in-the-money). Furthermore, call and put options are over-priced (under-priced) and underpriced (over-priced), respectively, when the SSE 50 ETF index options market is inefficient. Traders can take a long or short position based on call-put option pricing to reduce hedging costs and increase speculative premiums.