Abstract
Classical finance theory asserts that option prices should simultaneously reflect equilibrium market expectations about the underlying asset and conform to the no-arbitrage requirements of put-call parity. We explore whether these requirements hold during times of financial distress by investigating S&P 500 index option prices during the stock market crash of 2008-2009. We show that during this period, homogeneous expectations for put and call option markets violate put-call parity. The illusion of market segmentation, however, is a spurious byproduct of put-call parity restoration. We also find that market homogeneity and put-call parity are mutually compatible in a theoretically frictionless market absent subjective investor sentiment.
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