Market Efficiency Test Of Australian Options Market Using Put Call Parity Analysis

Eng K. P. Lee, Edith Cowan University

Abstract

The aims of this thesis is twofold. The primary objective is to test the market efficiency of Australian Options Marlcet (AOM) using the put call parity model. In addition, empirical evidence on the put call parity model is also gather. The put call parity model specified a deterministic relation between the prices of calls and puts. In particular, the put call parity model spec.1fies an upper and lower boundary conditions. A breach in the put call parity model result in arbitrage opportunities which is inconsistent with a efficient market. Four companies share options traded in AOM over a six month period, were used to test whether' the put call parity pricing relation was maintained. The thesis is divided into five chapters. Chapter 1 spell out the aims of the thesis and a brief overview of the structure of AOM. This is follow by a literature review on previous studies of put call parity analysis. Chapter 3 describe the methodology and hypothesis tested in the current study. The findings of the test are reported in Chapter 4. The final chapter summarizes the methodology and findings of this thesis. The findings of the thesis support the hypothesis that the AOM is efficient over the period study. Violations of put call parity boundary conditions were infrequent None of these violations yield economic profits for potential arbitragers. Lower boundary violations occur more often than upper boundary violations. In addition, the lower boundary violations appear to be affected by companies specific effect, time to maturity effect and degree in which options is "in the money".