Working Papers 2002 – Abstracts
Nonsimultaneity and Futures Option Pricing: Simulation and Empirical Evidence
Robert E.J. Hibbard, Rob Brown, and Keith R. McLaren
Empirical tests of option pricing models are joint tests of the 'correctness'
of the model, the efficiency of the market and the simultaneity of price
observations. Some degree of nonsimultaeity can be expected in all but
the most liquid markets and is therefore evident in many non-US markets.
Simulation results indicate that nonsimultaneity is potentially a significant
problem in empirical tests of futures option pricing models. Empirical
results using Australian data show that a five-minute window for matching
transactions does not remove the nonsimultaneity bias for near-the-money
and out-of-the money options. A more accurate matching may therefore be
required. The nonsimultaneity bias is effectively removed if a five-minute
window is employed for in-the-money options.
Keywords: Nonsimultaneity; Futures option; Mispricing.
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