Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market. Issue 12 (12th February 2014)

• Record Type: Journal Article
• Authors: Chen, Chin‐Ho; Chung, Huimin; Yuan, Shu‐Fang
• Is Part Of: Journal of futures markets. Volume 34:Issue 12(2014:Dec.)
• Page Start: 1122
• Page End: 1145
• Publication Date: 2014-02-12
• Subjects: Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.21655
• Languages: English
• ISSNs: 0270-7314

Abstract

<abstract abstract-type="main"> <title> <x xml:space="preserve">Abstract</x> </title> <sec id="fut21655-sec-0001" sec-type="section"> <p>This study examines whether deviations from put–call parity are informative about future volatility in the underlying index. Using the difference in implied volatility between call and put options to measure these deviations, we find that deviations from put–call parity predict future volatility. The predictability becomes stronger as option liquidity increases and the liquidity of the underlying index decreases. The results for volatility prediction remain significant even after controlling for implied volatility, information shocks, other information variables on return and volatility used widely in the literature, and short sales constraints. In addition, our results also show that deviations from put–call parity contain information about the future trading volume of options and the underlying index. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:1122–1145, 2014</p> </sec> </abstract>