Publication Type

Journal Article

Version

submittedVersion

Publication Date

12-2020

Abstract

Conventional wisdom suggests synthetic stock prices are lower than actual prices due to short‐sale constraints and voting premiums. This study finds that such underpricing of the synthetic midquote disappears if arbitrageurs face security borrowing costs. The synthetic spread predominantly contains the actual spread. Synthetic stock overpricing is as common as underpricing but the former is more persistent and more profitable. The difference between synthetic and actual quotes is significantly affected by options market makers' hedging costs and investors' demand for leverage.

Keywords

arbitrage, law of one price, options, put-call parity, short selling

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Futures Markets

Volume

40

Issue

12

First Page

1809

Last Page

1824

ISSN

0270-7314

Identifier

10.1002/fut.22153

Publisher

Wiley

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1002/fut.22153

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