Abstract
The put-call parity (PCP) is traditionally tested by examining whether arbitrage strategies earn ex post profits. These 'direct' tests of PCP caution that these violations of PCP suggest the arbitrage models are subject to significant risk due to market frictions. The previous empirical results also indicate that when market frictions are taken into account, the deviations form PCP can fluctuate within a bounded interval without giving rise to any arbitrage profit. In contrast with previous studies, we presents a model of the option price mean reverting to a function form of PCP. We employ variance ratio test to the deviations of PCP with randomization and Bayesian Gibbs sampling viewpoint in the context of a three-state Markov-switching model. The result shows that the PCP deviations from the electronic screen-traded DAX index option, which is calculated as if the dividends are reinvested in the index, displays mean reversion at long horizons. On the other hand, those deviations from the floor-traded S&P500 index option, which is not corrected for dividend payments, vary randomly.
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