Abstract
The informational efficiency of the market for options on the German stock index DAX is examined using intraday transactions data. Problems of previous studies on options-market efficiency, arising from dividend estimation and the early-exercise effect, are avoided, because the DAX is a performance index and DAX options are European options. Ex-post and ex-ante tests are carried out to simulate trading strategies that exploit irrational lower-boundary violations of observed option prices. Because the lower-boundary conditions are solely based on arbitrage considerations, the test results do not depend on the assumption that investors use a particular option-pricing model. The investigation shows that ex-post profits are, in general, dramatically reduced when the execution of arbitrage strategies is delayed and/or transaction costs are accounted for. However, arbitrage restrictions, which rely on short selling of the component stocks of the index, tend to be violated more often and with higher persistence. An analysis of consecutive subsamples suggests that, over time, traders have been subjected to a learning process when pricing this relatively new instrument. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 405–424, 2000
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