DAILY AND INTRADAILY TESTS OF EUROPEAN PUT-CALL PARITY

Existing empirical studies of the put-call parity condition report fre quent, substantial violations. An important problem in interpreting th ese results is that these studies all investigate American options. Wh ile some of these studies attempt to reduce the effects of possible ea rly exercise on their tests, they cannot fully account for the effect of early exercise. Therefore, it is not possible to conclude from thes e studies whether, or to what extent, observed put-call parity violati ons are due to market inefficiency or due to the value of early exerci se. We avoid the early exercise problem by testing put-call parity usi ng European options. We find violations that are much less frequent an d smaller than the studies using American options. Moreover, these vio lations reflect premia for liquidity (immediacy) risk.