The internal and cross market efficiency in index option markets: an investigation of the Italian market

The aim of the present paper is to provide evidence on the internal efficiency of the Italian index option market and to verify the consistency of the latter notion of efficiency with the cross market one. To this end a model-free approach is taken, whereby strategies involving only options are tested by means of a high frequency dataset. These strategies may provide a superior test of parity among index options since they do not involve the index replication issues and usefully complete previous studies which focused on cross-market efficiency only. The results obtained clearly support the efficiency of the Italian market and comparatively highlight a high level of consistency between internal and cross market efficiency.