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
Citation
HU, Jianfeng.
Is the synthetic stock price really lower than actual price?. (2020). Journal of Futures Markets. 40, (12), 1809-1824.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6590
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1002/fut.22153