Institute of Business and Management
|關鍵字:||波動率差;成對交易;市場交互效率檢定;Volatility Spread;Pair Trading;Cross-market Efficiency|
Based on the fact that the market capitalization of the electronic sector often accounts for about 70% of the total market capitalization of the Taiwan stock market, we consider if there exist a common volatility factor and a long-run stable relationship between the electronic sector index and the Taiwan Stock Exchange capitalization weighted stock index and, therefore, between the implied volatilities of the options contracts, whose underlying indices are the electronic sector index and the Taiwan Stock Exchange capitalization weighted stock index, respectively. In particular, in order to examine such a conjecture, this paper firstly tests whether the implied volatilities posses the property of long memory and a common volatility factor. Secondly, we construct a mean-reverting regression model to capture the dynamic behavior of the spread between the implied volatilities. Finally, we investigate the cross-market efficiency of the index options market in Taiwan according to the pair trading strategies of volatility spread. By utilizing the pair trading strategies, we can avoid calculating the daunting fair values of options contracts and just focus on the spread of implied volatilities. In addition to the strategies studied in the literature, we also design a pair trading strategy, which is based on the speed for the volatility spread to revert to its long term mean, to study the cross-market efficiency of the index options market in Taiwan. The empirical results show that there exists a common factor and a long-run stable relationship between the implied volatilities of the two index options contracts and that the dynamic behavior of the volatility spread follows a mean-reverting stationary process. Regarding the test of cross-market efficiency, we find that after taking the margins and transaction costs into account, the options portfolios constructed based on the volatility spread do not trade much and deliver only insignificant profits. Overall, these results suggest that there does not exist significant pricing error between the options contracts of the electronic sector index and the Taiwan Stock Exchange capitalization weighted stock index and the pair trading strategies based on the spread of their implied volatilities would not bring investors significant profits. Therefore, there exists cross-market efficiency for the index options market in Taiwan.
Journal of Management and Systems