Variance based efficiency test of OMX index option markat
(English)In: European Journal of Finance, ISSN 1351-847X, E-ISSN 1466-4364Article in journal (Refereed) Submitted
n this paper, followed by the market efficiency definition of the absence of arbitrage opportunity in the market, we test the market efficiency of the OMXS30 index option market.
We first check the arbitrage opportunity by examining the boundary conditions and the
Put Call Parity that must be satisfied in the market. Then a variance based efficiency test is performed by establishing a
risk neutral portfolio and re-balancing the initial portfolio in different trading strategies. In order to choose the most appropriate model for option price and hedging strategies, we calibrate several most applied models, i.e. the Black Scholes, Merton, Heston, Bates, and Affine Jump Diffusion models. Our results indicate that the Affine Jump Diffusion model significantly outperforms other models in the option price forecast and the trading strategies. Both the boundary and the Put Call Parity tests and the dynamic hedging strategy give evidence that no significant abnormal returns can be obtained in the OMXS30 option market, thereby supporting the market efficiency.
Option markets, Efficiency test, Stochastic Volatility with Jumps, Mean variance hedge
Research subject Business Administration
IdentifiersURN: urn:nbn:se:su:diva-129950OAI: oai:DiVA.org:su-129950DiVA: diva2:926200
Arne Ryde finance workshop, 2013