An empirical test of ‘put call parity’

Abstract

In this article, we examined the validity of ‘Put Call Parity’ (PCP) in the Israeli stock market. Estimating the parameters for the PCP equation, we reject the validity of PCP with a 100% confidence level. The estimated PCP equation includes a significant intercept that points to the possibility of having arbitrage opportunities.

Measuring the profit rate for portfolios that include options with various exercise prices, we find a potential profit of about 3%–3.4% in all cases.

Keywords:

• put call parity
• arbitrage

JEL Classification::

• G10

Notes

¹ Put option, call option and the bond should have the same expiration date.

² PCP is the current value of the government bond.

³ The average commission fee is about 0.6% per an arbitrage combination, which leaves a pre-tax profit of 2.69%–2.83%.