Paper: arXiv 2604.19604

Authors: Useong Shin

Abstract

Put-call parity is a terminal-payoff identity; quoted residuals against traded futures are near zero. Yet enforcing parity is path-dependent, exposing arbitrageurs to daily settlement, margin, and finite capital. Using minute-level NBBO data on S&P 500 and Russell 2000 options, I extract option-implied discount factors, compare them with the OIS curve, and construct an annualized carry gap. A reduced-form specification centered on a volatility times sqrt(tau) path-risk term links the carry gap to implementation risk, trading frictions, and financial conditions, with coefficient signs stable across leave-one-year-out validation. The carry gap is an implementation wedge invisible in price space but systematic in carry space.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The research combines sophisticated quantitative derivation of the carry gap using implied discount factor pipelines with heavy, high-frequency empirical validation using minute-level NBBO data and rigorous out-of-sample testing.

Research Flowchart

  flowchart TD
    A[<b>Goal:</b> Quantify implementation risk in Put-Call parity] --> B[<b>Data:</b> Minute-level NBBO <br/>(S&P 500 / Russell 2000)]
    B --> C[<b>Computation:</b> Extract implied discount factors <br/> & construct annualized carry gap]
    C --> D[<b>Model:</b> Reduced-form regression <br/> (Carry gap ~ path-risk term)]
    D --> E[<b>Validation:</b> Leave-one-year-out <br/> stability testing]
    E --> F[<b>Findings:</b> Carry gap is a systematic <br/> implementation wedge due to frictions]

Cited References (16)

  1. Synthetic forwards and cost of funding in the equity derivative market (2020) — link
  2. Arbitrage Crashes and the Speed of Capital (2012) — link
  3. Market liquidity and funding liquidity (2009) — link
  4. Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets (2004) — link
  5. Equilibrium and welfare in markets with financially constrained arbitrageurs (2002) — link
  6. Efficiency in index options markets and trading in stock baskets (2001) — link
  7. The Limits of Arbitrage (1997) — link
  8. Put-call parity and market efficiency (1979) — link
and 8 more
  1. Transactions costs and the relationship between put and call prices (1974) — link
  2. THE RELATIONSHIP BETWEEN PUT AND CALL OPTION PRICES (1969) — link
  3. Chicago Fed National Financial Conditions Index [NFCI] (2026)
  4. Historical ES and RTY futures BBO data (2026)
  5. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (1997) — link
  6. Implied Interest Rates (1986) — link
  7. Declaration of interest The author declares no competing interests
  8. the Board of Governors of the Federal Reserve

0 of 16 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.