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Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market

Authors

  • Chin-Ho Chen,

    Corresponding author
    1. Chin-Ho Chen and Huimin Chung are collocated at the Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan
    • Correspondence author, Institute of Finance, National Chiao Tung University, No. 1001 Ta-Hsueh Road, Hsinchu 30050, Taiwan. Tel: +886-3-5712121 ext. 57075, Fax: +886-3-5733260, e-mail: chinho.rrriver.chen6@gmail.com

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  • Huimin Chung,

    1. Chin-Ho Chen and Huimin Chung are collocated at the Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan
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  • Shu-Fang Yuan

    1. Shu-Fang Yuan is at the Department of Business Administration, Nanhua University, Chiayi County, Taiwan
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  • The authors thank Robert Webb (the editor), Wen-Liang Hsieh, Wei-Peng Chen, and especially an anonymous referee for helpful comments and suggestions.

Abstract

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

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