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An empirical study of the cross market efficiency of the index options market: A case study from the Italian derivatives market

El Kalak, Izidin; Hudson, Robert


Izidin El Kalak


© 2020, Emerald Publishing Limited. Purpose: This study aims to examine the cross-market efficiency of the FTSE/MIB index options contracts traded on the Italian derivatives market (IDEM) during a period including the financial crisis between 1st October 2007 and 31st December 2012 using daily option prices. Design/methodology/approach: Two fundamental no-arbitrage conditions were tested: the lower boundary condition (LBC) and the put–call parity (PCP) condition while taking into account the role of transaction costs in mitigating the number of violations reported. Ex post tests of LBC and PCP revealed a low incidence of mispricing in this market. Furthermore, to check the robustness of the results obtained by the ex post tests, ex ante tests were applied to PCP violations occurring within a one-day lag. Findings: The results showed a significant drop in the number of profitable arbitrage strategies. The findings obtained from all these tests generally support the cross-market efficiency of the Italian index options market during the sample period, though some violations were occasionally reported. Overall, the number and monetary value of the violations reported declined during the post-financial crisis period compared to those during the financial crisis period. Research limitations/implications: This study can be extended to test the relationships between arbitrage profitability and other factors such as the moneyness (in the money, out of the money, at the money) of options and the maturity of options. Options market efficiency tests can be conducted such as call and put spreads, box spreads and put/call convexities (butterfly spreads). Originality/value: There are several factors that influenced the decision to test the Italian index options market. First, the limited number of studies conducted on this market. Second, the fact that the two main studies on this market are relatively old, which makes it interesting to test the efficiency of this market with respect to a new set of data, taking into account the introduction of the Euro and the impact of the recent financial crisis on this market and whether the market efficiency hypothesis holds during the period of crisis. Third, it is important to consider the effect of the new rules applied to this market.


El Kalak, I., & Hudson, R. (2020). An empirical study of the cross market efficiency of the index options market: A case study from the Italian derivatives market. Review of accounting & finance,

Journal Article Type Article
Acceptance Date Apr 17, 2018
Online Publication Date Apr 1, 2020
Publication Date Jan 1, 2020
Deposit Date Apr 22, 2018
Publicly Available Date Feb 2, 2020
Journal Review of Accounting and Finance
Print ISSN 1475-7702
Electronic ISSN 1758-7700
Publisher Emerald
Peer Reviewed Peer Reviewed
Keywords Cross-market efficiency; index options market; no-arbitrage conditions; financial crisis
Public URL
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