Evidence on inefficiency of the Euribor option market

Authors: Kuo, I.-Doun¹; Lin, Yueh-Neng²

Source: Applied Financial Economics, Volume 19, Number 12, June 2009 , pp. 1009-1017(9)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This article examines the efficiency of the Euro Inter-bank Offered Rate (Euribor) option market based on a constant-volatility option pricing model of Heath et al. (HJM, 1990, 1992) over the period 1 January 2003 to 31 December 2005. Trading mispriced options associated with a riskless hedging strategy on average produce abnormal profits after taking into account the transaction costs for floor traders. For floor traders' point of view, our results show an inefficient Euribor option market for our sample period. For retail customers, however, trading associated with the riskless hedging strategy the abnormal profits may not be earned sufficiently to cover the transaction costs.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/09603100701604266

Affiliations: 1: Department of Finance, Tunghai University, Taichung, Taiwan 2: Department of Finance, National Chung Hsing University, Taichung, Taiwan

Publication date: 2009-06-01

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