Box Spread Arbitrage Profits Following the 1987 Market Crash: Real or Illusory?

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1997

Posted: 10 Apr 1997

See all articles by Michael Lee Hemler

Michael Lee Hemler

University of Notre Dame - Department of Finance (deceased)

Thomas W. Miller, Jr.

Mississippi State University; Consumers' Research

Abstract

We examine market efficiency before and after the 1987 Market Crash using the box spread strategy implemented with European-style S&P~500 Index (SPX) options. Before the Crash, apparent arbitrage opportunities were rare and simulated trades were unprofitable assuming a one-minute execution delay. After the Crash, apparent arbitrage opportunities were frequent and simulated trades were profitable even assuming a five-minute execution delay. Our analysis makes the routine assumption that quotes are good until updated to construct a time series of prevailing quotes sampled at 30-second intervals. If this assumption is valid, then arbitrage profits were actually available. If this assumption is invalid, then such profits could have been illusory. Either scenario, however, implies that SPX market efficiency decreased following the Crash---prevailing price quotes repeatedly failed to satisfy the fundamental parity relation underlying the box spread.

JEL Classification: G13, G14

Suggested Citation

Hemler, Michael Lee and Miller, Jr., Thomas W., Box Spread Arbitrage Profits Following the 1987 Market Crash: Real or Illusory?. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1997, Available at SSRN: https://ssrn.com/abstract=8271

Michael Lee Hemler (Contact Author)

University of Notre Dame - Department of Finance (deceased)

Thomas W. Miller, Jr.

Mississippi State University ( email )

Mississippi State, MS 39762
United States

Consumers' Research ( email )

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