THE INFORMATION CONTAINED IN OPTION PRICES AND MARKET EFFICIENCY
Abstract
The Black-Scholes option pricing model, as generalized by Merton to include dividend payment information, is used to calculate the implied variance rate of the stock price process using a method proposed by Chiras and Manaster. Their riskfree option hedging strategy is then employed to test two related questions: Is there still some inefficiency in the Chicago Board Options Exchange (CBOE) options prices? And secondly, what happens to the disequilibrium inherent in the prices of the options used in this strategy? The results indicate that the CBOE displays approximately the same degree of inefficiency as Chiras and Manaster reported, and that the inefficiency is marginally exploitable after minimal transactions costs are considered in an ex ante test. The results also indicate that the disequilibrium present in the CBOE prices begins to return toward equilibrium immediately and steadily, but that the process of the prices returning to equilibrium takes at least one month to be completed.
Degree
Ph.D.
Subject Area
Finance
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