We test the Index options market efficiency by means of a statistical arbitrage strategy, i.e. pairs trading. Using data on five Index Option Market of the Euro Area, we first identify any potential option mispricing based on deviations from the long-run relationship linking their implied volatilities. Then, we evaluate the profitability of a simple pair trading strategy on the mispriced options. Despite the signals of potential mispricing are frequent, the statistical arbitrage does not produce significant profits, thus providing evidence in support of Index Option market efficiency. The results, which remain unchanged in a variety of robustness checks, also prove that the observed profits are strongly associated to the moneyness of the options traded while they do not correlate to options’ maturity or to financial market turbulence.

Brunetti, M., DE LUCA, R. (2022). Pairs Trading in the Index Option Market. EURASIAN ECONOMIC REVIEW [10.1007/s40822-022-00221-9].

Pairs Trading in the Index Option Market

Marianna Brunetti
;
Roberta De Luca
2022-01-01

Abstract

We test the Index options market efficiency by means of a statistical arbitrage strategy, i.e. pairs trading. Using data on five Index Option Market of the Euro Area, we first identify any potential option mispricing based on deviations from the long-run relationship linking their implied volatilities. Then, we evaluate the profitability of a simple pair trading strategy on the mispriced options. Despite the signals of potential mispricing are frequent, the statistical arbitrage does not produce significant profits, thus providing evidence in support of Index Option market efficiency. The results, which remain unchanged in a variety of robustness checks, also prove that the observed profits are strongly associated to the moneyness of the options traded while they do not correlate to options’ maturity or to financial market turbulence.
2022
In corso di stampa
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-S/03 - STATISTICA ECONOMICA
English
Senza Impact Factor ISI
pairs trading, option market efficiency
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3914713
Brunetti, M., DE LUCA, R. (2022). Pairs Trading in the Index Option Market. EURASIAN ECONOMIC REVIEW [10.1007/s40822-022-00221-9].
Brunetti, M; DE LUCA, R
Articolo su rivista
File in questo prodotto:
File Dimensione Formato  
BD_Option PT_EAER_final.pdf

accesso aperto

Tipologia: Documento in Pre-print
Licenza: Non specificato
Dimensione 1.54 MB
Formato Adobe PDF
1.54 MB Adobe PDF Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/311727
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 1
  • ???jsp.display-item.citation.isi??? 2
social impact