A Meta-Analysis of the Efficiency of Options Market and the Arbitrage Strategies

Document Type : Research Paper


1 Associate Prof., Department of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

2 MSc., Department of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.



Objective: While inefficiencies in the financial markets are the leading cause of capital misallocation, options market efficiency is a major area of interest within this field of study. Since arbitrage efforts to take advantage of arbitrage profit opportunities in the options market lead the market to efficiency, the current study seeks to explore arbitrage strategies that can be used in this regard.
Methods: In the literature, there are two strategies to do the options market efficiency tests. The first strategy is to compare the market price with the implied price derived from theoretical models such as the Black-Scholes model. The second strategy is no-arbitrage options pricing relations violation test based on the hypothesis that there is no arbitrage opportunity in the market (i.e., the selected approach in this research). The advantage of examining no-arbitrage options pricing relations is that they can provide a simple way of testing the efficiency of the options market without imposing restrictions on the preferences of investors or distributional assumptions on the return of the underlying asset. The description of variables measured in empirical studies changes over time and between the different countries and research conditions. The meta-analysis approach (based on studies published from 1978 to 2019) was used to identify arbitrage strategies and the amount of profit from each strategy. In addition, the analysis of variance and a one-sample t-test was used to rank and compare the strategies. In total, 54 empirical studies with the support of more than 3.7 million options transactions and 1,315 effect sizes (research sample) were meta-analyzed.
Results: The results showed that in the whole sample, the options market is always efficient. This means that the cumulative effect size for the whole sample (empirical tests performed in different countries and different time periods) is significantly different from zero. In addition, in combined strategies (which include both buy and sell options), there is more arbitrage profit opportunity than in simple strategies. The reliability of the tests was evaluated by applying 26 experimental conditions.
Conclusion: In all cases, the superiority of combined strategies was confirmed. On the other hand, the reasons for the divergence of efficiency in the options market were discovered. First, combined strategies in which options are traded simultaneously have made the options market inefficient. Accordingly, it is argued that market efficiency is underestimated in cases where no-arbitrage relations are based on trading strategies including simultaneous trading of put and call. On the other hand, in such strategies, investors earn more arbitrage profit. It was pointed out that the most likely reason for this result is the complexity of these strategies, which requires the simultaneous efficiency of the call market, the put market, and the spot market. For example, in different countries, assuming transaction costs in the presence of dividends and etc., the research results remain robust.


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