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Efficiency of the foreign currency options market

Hoque, A., Chan, F. and Manzur, M. (2008) Efficiency of the foreign currency options market. Global Finance Journal, 19 (2). pp. 157-170.

Link to Published Version: http://dx.doi.org/10.1016/j.gfj.2008.02.002
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Abstract

This paper provides a new test of the efficiency of the currency option markets for four major currencies — British Pound, Euro, Swiss Frank and Japanese Yen vis-à-vis the U.S. dollar. The approach is to simulate trading strategies to see if the well-accepted no-arbitrage condition of put–call parity (PCP) holds in a trading environment. Augmented Dickey–Fuller and Philips–Perron tests are used to check for the presence of unit roots in the data, followed by a formal econometric analysis. The results indicate that the most currency option prices do not violate the PCP conditions, when transaction costs are allowed for.

Publication Type: Journal Article
Publisher: Elsevier
Copyright: Elsevier
Publishers Website: http://www.journals.elsevier.com/global-finance-jo...
URI: http://researchrepository.murdoch.edu.au/id/eprint/11771
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