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Book part
Publication date: 27 February 2009

Soku Byoun and Hun Young Park

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index…

Abstract

The KOSPI 200 options at its initial stage generated a significant number of violations in no-arbitrage conditions which involve both options and the underlying index. However, when the arbitrage conditions are formed independent of the underlying index, the average size of violation is not large and few arbitrage opportunities exist. There are more frequent violations on near-maturity days, with in-the-money options and larger violation sizes during opening and closing hours. The arbitrage opportunities remain intact even after realistic transaction costs are taken into account and index futures prices are used instead of the stock index in an alternative specification.

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Research in Finance
Type: Book
ISBN: 978-1-84855-447-4

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Article
Publication date: 16 August 2013

Jianhua Ye and WenFang Li

This paper makes attempt to test the firm‐level long‐term asset growth (LAG) effects in returns by examining the cross‐sectional relation between firm‐level LAG and…

Abstract

Purpose

This paper makes attempt to test the firm‐level long‐term asset growth (LAG) effects in returns by examining the cross‐sectional relation between firm‐level LAG and subsequent abnormal stock returns. The purpose of this paper is to investigate whether limits‐to‐arbitrage can explain this asset growth anomaly in Chinese stock market.

Design/methodology/approach

Empirical research was carried out.

Findings

The empirical results show that asset growth anomaly in A‐share stock market is significant and robust. The conclusion provides more evidence for the existence of asset growth anomaly. Additionally, arbitrage risk indicated by idiosyncratic risk cannot explain the anomaly, arbitrage risk indicated by accounting information transparency can partly explain the anomaly, and arbitrage cost proxied by Amihud's measure of illiquidity indicator can completely explain the asset growth anomaly in A‐share stock market.

Research limitations/implications

The results of this paper imply that strengthening the disclosure of firm information and improving the liquidity of the market are important to improve the efficiency of the A‐share stock market.

Originality/value

The paper selects the sample of non‐financial listed companies in A‐share stock market to research the asset growth anomaly and investigates whether limits‐to‐arbitrage can explain this anomaly. This paper proves the existence of asset growth anomaly in A‐share stock market and is a good reference for further researches.

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Nankai Business Review International, vol. 4 no. 3
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 21 September 2009

John A. Doukas and Meng Li

This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information…

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Abstract

This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information. Specifically, we find that value stock prices exhibit a considerably slow adjustment to both common and firm‐specific information relative to glamour stocks. The results show that this pattern of diferential price adjustment between value and glamour stocks is mainly driven by the high arbitrage risk borne by value stocks. The evidence is consistent with the arbitrage risk hypothesis, predicting that idiosyncratic risk, a major impediment to arbitrage activity, amplifies the informational loss of value stocks as a result of arbitrageurs’ (informed investors) reduced participation in value stocks because of their inability to fully hedge idiosyncratic risk.

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Review of Behavioural Finance, vol. 1 no. 1/2
Type: Research Article
ISSN: 1940-5979

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Open Access
Article
Publication date: 30 November 2010

Jin Yoo and Geun Beom Kim

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether…

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Abstract

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether the market, combined with the stock market, its underlying market, has been offering any arbitrage opportunities to market participants for the period of May 6th, 2008 to March 11, 2010, focusing on the two futures contracts of Samsung Electronics and Hyundai Motors, the two most actively traded ones. Our findings are as follows. First, there have been arbitrage opportunities for the two futures in either direction. Second, the average time period for an arbitrage opportunity was two seconds so arbitrage transactions were feasible indeed. Third, nevertheless, some arbitrage transactions ended up with a loss because the estimated spot price at maturity to carry out an arbitrage trading turned out to be significantly different from the realized one. The discrepancy in these two prices causes a seemingly very safe arbitrage trading a risky one. This risky feature of an arbitrage trading has never been addressed in depth in a paper or a book before, and is a major contribution of this paper.

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Journal of Derivatives and Quantitative Studies, vol. 18 no. 4
Type: Research Article
ISSN: 2713-6647

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Article
Publication date: 15 February 2016

Honglei Yan, Suigen Yang and shengmin zhao

The purpose of this paper is to study the pricing efficiency of convertible bonds and arbitrage opportunities between the convertible bonds and the underlying stocks thus…

Abstract

Purpose

The purpose of this paper is to study the pricing efficiency of convertible bonds and arbitrage opportunities between the convertible bonds and the underlying stocks thus improve market efficiency.

Design/methodology/approach

Using nonparametric fixed effect panel data model, the authors build pricing model of convertible bonds and obtain fitted value for them. Then the authors constructs simultaneous confidence band for the smooth function to identify mispricing and study the pricing efficiency and arbitrage opportunities of convertible bonds.

Findings

Result shows, convertible bonds’ prices largely depend on stock prices. Pricing efficiency does not improve during the past few years as there are quite a few trading opportunities. Arbitrage opportunities increase as the stock prices approach it maxima, and selling opportunities for convertible bonds surpass buying opportunities which indicates that investors use market neutral strategies to arbitrage. Pricing efficiencies varies a lot and it is affected by the features of the stocks and convertible bonds. Index stocks eligible for margin trading with high liquidity enjoy higher pricing efficiency.

Research limitations/implications

The study does not take into account trading cost and risk management measures.

Practical/implications

Arbitrage between the underlying and the convertible bonds is profitable and contributes to pricing efficiency therefore should be encouraged. The regulator should pay attention to the extreme mispricing of the underlying and convertible bonds which cannot be corrected by the market as there might be manipulation.

Originality/value

Since traditional pricing methods are based on the framework of non-arbitrage equilibrium with the assumption of balanced and perfect market, there are many restrictions in the pricing process and the practical utility is somewhat limited, and the impractical assumptions lead to model risk. This study uses nonparametric regression to study the pricing of convertible bonds thus circumvents the problem of model risk. Simultaneous confidence band for smooth function identifies mispricing and explicitly reflects the variation of pricing efficiency as well as signalizes trading opportunities. Application of nonparametric regression and simultaneous confidence band in derivative pricing is advantageous in accuracy and simplicity.

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China Finance Review International, vol. 6 no. 1
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 8 September 2021

Qingzhong Ma, David A. Whidbee and Wei Zhang

This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.

Abstract

Purpose

This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.

Design/methodology/approach

An event study approach was adopted to measure announcement-period cumulative abnormal returns. Long-horizon returns are measured using buy-and-hold abnormal returns (BHARs), calendar time portfolios (CTPRs), and subsequent earnings announcement period abnormal returns. Main methodologies include ordinary least squared (OLS) regressions, Logit regressions, and portfolio analysis.

Findings

(1) Acquirer stocks with high idiosyncratic volatility (the proxy for the security level characteristic most directly associated with limits to arbitrage) earn higher announcement-period abnormal returns. (2) The return pattern reverses over the subsequent longer horizon, resembling news-driven transitory mispricing. (3) The mispricing is greater when deal and firm characteristics exacerbate the limits of arbitrage, and it weakens over time. (4) Transactions by higher idiosyncratic volatility acquirers are more likely to fail.

Originality/value

Limits of arbitrage theory have been tested mostly in information-free circumstances. The findings in this paper extend the supporting evidence for limits of arbitrage explaining mispricing beyond the boundaries of information-free circumstances.

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Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

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Book part
Publication date: 11 August 2016

Reza Habibi

This chapter is concerned with finding the optimal arbitrage path in a foreign exchange market. First, an algorithm for the optimal arbitrage path is derived. Then, the…

Abstract

This chapter is concerned with finding the optimal arbitrage path in a foreign exchange market. First, an algorithm for the optimal arbitrage path is derived. Then, the Markov chain solution to the problem of most profitable path is given. Also, a game theory perspective to the problem is given.

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The Spread of Financial Sophistication through Emerging Markets Worldwide
Type: Book
ISBN: 978-1-78635-155-5

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Book part
Publication date: 8 June 2021

Abhijit Dutta and Madhabendra Sinha

The knowledge economy (KE) which provide for an alternative to production-based economy and brick and mortar economy has a tremendous opportunity. KE has emerged due to…

Abstract

The knowledge economy (KE) which provide for an alternative to production-based economy and brick and mortar economy has a tremendous opportunity. KE has emerged due to the advent of skill concentration in nation states. However, the traditional production economy provides individual arbitrage opportunity which acts as a sideline for growth of the economy. In the modern economy, the higher the ability to create an edge for price for the knowledge, the greater will be the ability of the nation state to create and arbitrage process. Any economy which is driven by an innovative education system, appreciates, and adopts knowledge is the one which becomes successful in the knowledge process and a developed KE. Information technology forms a major component of knowledge process but is not the entire gamete of knowledge. Hence, it should not be confused that KEs are information industry driven alone. This paper tries to develop a model to check whether KE has the ability to support arbitrage process. Here the probability rate of growth in GDP is taken as the key element for the purpose of solving the theoretical proposition. The result shows that there are positive probabilities of the KE in providing arbitrage premium for individual which can fire the growth of the economy.

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Comparative Advantage in the Knowledge Economy
Type: Book
ISBN: 978-1-80071-040-5

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Book part
Publication date: 2 December 2003

Y.Peter Chung, Jun-Koo Kang and S.Ghon Rhee

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei…

Abstract

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei 225 Futures contracts in Osaka and the corresponding Nikkei 225 Index in Tokyo. Incorporating more realistic transaction-cost estimates and various institutional impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.

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The Japanese Finance: Corporate Finance and Capital Markets in ...
Type: Book
ISBN: 978-1-84950-246-7

Open Access
Article
Publication date: 30 November 2006

Jae Ha Lee and Deok Hee Hahn

This study explores the arbitrage profitability of box spread strategies to test the KOSPI200 options market efficiency. using minute-by-minute data for the December 2003…

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Abstract

This study explores the arbitrage profitability of box spread strategies to test the KOSPI200 options market efficiency. using minute-by-minute data for the December 2003 - June 2004 period. The sample consists of 39.445 and 38.318 observations for small discrepancy and large discrepancy in exercise prices. respectively.

In the case of credit box spreads, there were 681 (2%) and 2.293 (6%) arbitrage observations for small and large discrepancies, while debit box spreads showed 831 (2%) and 3.098 (8%) observations for small and large discrepancies. In general, mean profit and median profit were different, and the arbitrage profit varied over time. The time to option expiration did not impact the arbitrage profit.

Also, the arbitrage profit of box spreads was significantly higher on Fridays for large discrepancy, and it varied across weekdays except the case of small-discrepancy debit box spread. Both arbitrage opportunities and profits substantially decreased as execution time increased. Our overall results suggest that the KOSPI200 options market has been efficient.

Details

Journal of Derivatives and Quantitative Studies, vol. 14 no. 2
Type: Research Article
ISSN: 2713-6647

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