Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper investigates arbitrage opportunities from the Australian market using the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. A thorough ex post analysis is first carried out. Tick-by-tick transaction price data allow the futures contracts, the call futures options and the put futures options to be matched within a one minute interval. This paper take into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. The results reveal a significant number of violations with 25.40% of the sample breaching the PCFP equation with an average profit of 6.733 index points for SFE member firms. Ex ante tests are also conducted whereby the trios that signified an ex post profit for members were lagged up to 3 minutes before being executed. The results were similar to the ex post results casting doubt on the efficiency and integration between these two derivative markets in Australia.