A reexamination of put-call parity on index futures

A study attempts to overcome the problems of data and trading non-synchronization faced by anyone studying mispricing in the derivitave securities markets. A data filtering technique is developed that minimizes susceptibility to these problems. As a result, a more reliable assessment of market efficiency can be made in testing the put-call parity equation. The basic put-call parity relationship to be tested is described, and the data filtering technique used to avoid problems of data and trading non-synchronization is discussed. The complications presented by early exercise of futures options and its potential impact on arbitrage profits are examined. An analysis of results is provided for the period May-June 1983. In addition, the study is advanced through June 1984 and tests a tax-modified put-call parity relationship. An appendix derives the tax-modified put-call parity equation, something which has been ignored heretofore in the literature.