The market efficiency analysis of China’s copper options based on risk-free arbitrages

ABSTRACT

This paper probes into the market efficiency and relevant issues of copper options, the first industrial options product launched in China and currently the only non-ferrous metals option. Since its listing on 21 September 2018, the copper options market, developing on the fast track, has become the largest copper options market in the world, and thus it is of important meaning to study its market efficiency. Taking the data of China’s copper options market from its debut to 30 April 2022 as a sample, this paper studies the efficiency of this market using three typical risk-free arbitrages such as put-call-future parity arbitrage, box spread arbitrage, and boundary arbitrage strategies. To better reflect the actual situation, this paper, when establishing options arbitrage strategy models, not only took into account various actual trading factors such as transaction costs, market impact costs, liquidity costs, margin, and capital opportunity costs but also combined daily and high-frequency data to present highly practical arbitrage strategies. According to empirical results, there are few arbitrage opportunities with a very low proportion when actual trading factors were considered. Overall, no evidence was found to prove that China’s copper options market significantly violates the market efficiency rule.

KEYWORDS:

• Put-call-future parity
• Box spread arbitrage
• Boundary arbitrage
• China’s copper options market
• Market efficiency

JEL CLASSIFICATION:

• G14; G15

Acknowledgements

We gratefully acknowledge the comments and suggestions of anonymous referees. This work was supported by the National Social Science Fund of China [23BJY203].

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ According to the regulations of the Shanghai Futures Exchange, options contracts corresponding to futures contracts with a contract month later than or same as November 2022 shall adopt American options, while those with contract months earlier than or same as April 2022 shall adopt European options. (May to October 2022 is a transition period where European options and American options coexist.).

Additional information

Funding

The work was supported by the National Social Science Fund of China [23BJY203].