Abstract
This research will aim at assessing the tests for market efficiency with an inclination towards the Italian Market Index. It also delves into how the Italian Market Index will be different from the other Market indices from different nations in Europe. In assessing this, the research will rely mostly on the data set offered by Mib30. In comparing these, the research will also seek to examine critically what parameters are used to set an efficient market and all the players that are involved (Merton 145).
This would be done by looking at both the retailer’s and the consumer’s side. The research also seeks to examine the efficiency as well as the shortcomings involved in using the Mib30 as the data set (Macbeth & Merville 1183). The research will also analyse the role of several frictions that are present in the testing of the Put Call Parity (Nisbet 390). It will also point out the substantive increase in the Italian Index Option.
Introduction
Central theme/Background
An efficient market is one which is free from bias in terms of investments (Puttonen 182). This part will seek to explain the general concept of index option markets (Klemkosky & Resnick 5). It will also in the context of the Italian Markets seek to expound on how efficient these markets are. In a cursory manner, the introduction will offer some basic perception about the Market Index Options of other countries especially within Europe.
The introduction will also have background information about the Efficient Market Hypothesis, its origins and recent development of the theory. It will seek to clearly and carefully define the concept EMH. Then outline the three forms of Market Efficiency, the Behavioural and Empirical Challenges of the EMH and then focus the analysis on a specific market showing that it is efficient with respect to a defined group of investors at a certain point in time.
The introduction will also introduce the put call parity concept and its application and calculation. At this level, it will just be basic introduction as it will be dealt with in depth later on. The introduction will further establish the link that actually exists between these different concepts. The introduction will also in a cursory manner give what triggered the research in the first place as well as the statement of the problem. It will give a general overview of the environment surrounding the markets to be analysed.
The purpose of the study/project
The first and foremost purpose of the paper will be to compare the Italian Market Index to the other European countries’ markets and benchmarks. This will be important when it comes to the comparing of the efficiency of the market and specifically the performance of the Italian Market Index against other countries. Another objective of the paper will be to bring out the evidence on the other markets within the Europe Market Index. This objective will co-ordinate the gradual development of the process of research because it will be establishing a solid theoretical foundation.
Identifying the usage of the Italian Market Index and its impact. This will be done with the main aim of assessing its efficiency in its functionality and the manner that it applies. It will be benchmarked against other countries from Europe too. Another purpose of the dissertation is to establish any factors that will be influencing the performance of different market indices.
Research questions
The main research question will seek to determine why despite the fact that it is extremely difficult to sustain that all markets are efficient with respect to all investors, it is certainly feasible to argue that a particular market is efficient with respect to a group of investors at a certain point in time (Joo & Dickinson 177).
Other questions that are to be dealt with in the research shall include the following questions: 1) How efficient is the Italian Market Options as compared to the other options available in the European Markets? 2) What are the parameters that are used to determine the efficiency of the markets that are being compared? In other words, this will seek to establish the benchmarks against which the market efficiency is to be compared against.
Definition of terms
The definition of terms will explain the terms to be used and the context in which they are used. For instance, for data set to be analysed, it will have to meet some criteria such as prices synchrosity which, in this context, will refer to the matching of each of the couple couple to the same minute of the Mib30 quotation (Mittnik and Rieken 260). In total, all prices are to be given an arbitrage condition that is within the same time (Chaudhury 4; Harvey & Whaley 46).
Review of the Literature
The literature review of this dissertation would be constructed mainly through the use of secondary data. This would mainly and to a greater extent encompass academic and commercial sources. These are normally classified as multiple source data. This is sometimes further divided into two broad categories:
- Area based
- Time series based data.
The theoretical framework for this research will be to evaluate the efficacy of the Italian Index Options (Cavallo & Mammola 173).
Methodology
Research Philosophy and Approach
The research of this dissertation will revolve around ‘Interpretivism’ which is the preferred philosophy in this case. Interpretivism is thus a philosophy that is suitably employed with the aim and a core purpose of identifying and researching new contexts in research rather than providing law-like generalisations. The researcher also realises and appreciates the complexity of this topic and thus remains focused towards the application of an inductive approach. In addition, the researcher employs interpretations that are critical in presenting the findings.
Data collection methods
The main data collection methods to be used in this dissertation will include in-depth interviews as well as sampling.
In-depth interviews. In-depth interviews will form a valuable source of the information required as they provide the researcher with the opportunity to fully explore the context which allows for greater and more apt understanding. It will also allow the researcher to identify some different perspectives that may be of greater relevance to the conducting of the research.
Sampling. The type of sampling method in use is the judgmental sampling otherwise referred to as non-probability sampling. This is applicable to the current dissertation since the research will have an in-depth focus as well as exploratory aim. The ideal interviewees in this sampling are the retail consumers.
Data Analysis and Results
The data set that will be applied during the research are the Mib30 as well as the Mib30 contracts. In analysing the data, there will be considerations as to the trend for different years and the efficiency performance of the markets (Gould & Galai 112). The results will then be used to try and project, in parity with the trend, the future expectations.
While analysing the data, the researcher will take into account the growth of the Mib30 contracts growth (Gemmil 891). Since its inception in 1995, the volume of the contracts being trade has been on the rise (Galai 170). In fact, in the first seven years, the growth has been very tremendous as shown below.
Graph showing Growth of the traded Mib30 contracts as from 1995 to 2002.
In order for the data set to be analysed in the research, the researcher will categorically ensure that that the data involved have actually satisfied the requirements: Prices synchronicity (Stoll 804), Maturity and strikes matching, Index adjustments for dividends and Estimation of the transaction costs (Phillips & Smith 191). These will form part of the analysis of the data set.
Conclusion
The findings of the research shall be to identify the efficiency of the Italian Market Index. The conclusion shall discuss the final remarks of the dissertation. It shall encompass any generalisation that has been included in the research. The conclusion part will also appreciate the limitations that have been faced during the whole research. Also important is the discussion on the Implications of the findings of the whole research. The researcher will explain the final remarks of the whole research on this part.
Works Cited
Cavallo,Laura., & Paolo Mammola. “Empirical tests of the efficiency of the Italian index options market.” Journal of Empirical Finance 7.1 (2000): 173-193. Print.
Chaudhury, Mo., & Glancard Capelle-Blancard. “Efficiency tests of the French index (CAC 40) options market.” McGill Finance Research Center 2.1 (2001): 4-52. Print.
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Gemmil, Gordon. “Did option traders anticipate the crash? Evidence from volatility smiles in the U.K. with U.S. comparisons.” The Journal of Futures Markets 16.8 (1996): 881–897. Print.
Gould, Jameson., & David Galai. “Transaction costs and the relationship between put and call prices”. The Journal of Financial Economics 1.0 (1974): 105–129. Print.
Harvey, Campbell., & Robert Whaley. “Market volatility prediction and the efficiency of the S&P 100 index option market.” Journal of Financial Economics 31.1 (1992): 43–73. Print.
Joo, Thomas., & James Dickinson. “A test of the efficiency of the European options exchange.” Applied Financial Economics 3.0 (1993): 175–181. Print.
Klemkosky, Robert., & Bruce Resnick. “Put–call parity and market efficiency.” The Journal of Finance XXXIV 1.1 (1979): 5-6. Print.
Macbeth, James., & Larry Merville. “An empirical examination of the Black–Scholes call option pricing model.” The Journal of Finance 34.1 (1979): 1173–1186. Print.
Merton, Robert. “Theory of rational option pricing.” The Bell Journal of Economics and Management Science 4 (1973): 141–183. Print.
Mittnik, Stephan & Sascha Rieken. “Put-call parity and the informational efficiency of the German DAXindex options market.” International Review of Financial Analysis 9 (2000): 259-279. Print.
Nisbet, Mary. “Put–call parity theory and an empirical test of the efficiency of the London traded options market.” Journal of Banking and Finance 16 (1992): 381–403. Print.
Phillips, Simon., & Charles Smith. “Trading costs for listed options – The implications for market efficiency.” Journal of financial economics 8 (1980): 179-201. Print.
Puttonen, Vert. “Boundary conditions for index options: evidence from the Finnish market.” Journal on Futures Market 13 (1993): 545 – 562. Print.
Stoll, Hans. “The relationship between put and call option prices.” Journal of Finance 24 (1969): 801- 824. Print.