An empirical investigation of the EOE gold options market. 1985
This paper builds on Becker’s (1984) work on gold options trading on the European Options Exchange. Using Merton’s rational boundary condition they found that while there were deviations from the expected price they were small and do not give much evidence against market efficiency. Also they found that the deviations decreased as the market became more established (it began trading in 1981).
Looking at the implied risk free rate of interest derived from these options they also assessed whether it was possible to engage in arbitrage activities. They find a number of occasions where they were deviations but none presented opportunities to earn risk free profits once transaction costs were accounted for.
Methodology: Merton’s rational boundary conditions, inferred risk free rate
Data: Daily closing price and volume data from the European Options Exchange for April to June 1981 and the same period in 1982
Citation: Ball, Clifford A., Walter N. Torous, and Adrian E. Tschoegl. “An empirical investigation of the EOE gold options market.” Journal of Banking & Finance 9.1 (1985): 101-113.
Abstract: On April 2, 1981, the European Option Exchange introduced the first organized exchange trading of options on spot gold. We study this new market for three months at its inception and in a parallel period a year later via various tests of rational boundary conditions. Additionally, we use call-put parity to infer implied risk free rates (IRFR’s). Deviations of the IRFR’s from the prevailing risk free rate permit the possibility of arbitrage through positions known as forward and reverse conversions. Our tests are modified to allow for transaction costs to more fully address the question of market efficiency.