Pricing and Informational Efficiency of the MIB30 Index Options

We analyze the pricing and informational efficiency of the Italian market for options written on the most important stock index, the MIB30. We report that a striking percentage of the data consists of option prices violating basic no-arbitrage conditions. This percentage declines when we relax the no-arbitrage restrictions to accommodate for the presence of bid/ask spreads and other frictions, but never becomes negligible. We also investigate the informational efficiency of the MIBO and conclude that option prices are poor predictors of the volatility of MIB30 returns. This conclusion is robust to a number of statistical and sampling methods. ∗We wish to thank Alberto di Stefano from BSI (Banca della Svizzera Italiana) who has made available the data used in this paper. We are also grateful to Giovanni Barone-Adesi, Laura Cavallo, Paolo Mammola, and seminar participants at Bocconi University, University of Southern Switzerland, and Tilburg University. Of course, the contents of the paper remain the sole responsibility of the authors. †Correspondence to: Gianluca Cassese, Istituto di Economia Politica, Bocconi University, Via Gobbi, 2 20136 Milan, Italy. Tel: (+39) 02-5836-5326; Fax: (+39) 02-5836-5343; e-mail: [email protected].