Paper: arXiv 2604.19605

Authors: Useong Shin

Abstract

Put-call parity is a risk-neutral identity, but enforcing it is path-dependent and capital-using. I study the carry gap, the annualized wedge between option-implied and OIS discount factors, in SPX and RUT options. Because parity enforcement ties up scarce capital, its opportunity cost may reflect outside investment opportunities. Adding low-frequency global asset-return components to an OIS-based baseline improves in-sample and leave-one-year-out out-of-sample R^2, with gains robust to broad-dollar neutralization, alternative asset blocks, and nested horizon selection. The evidence indicates reduced-form P-Q alignment: the carry gap is not empirically separable from physical-measure outside-option proxies, rather than behaving as a purely OIS-contained wedge.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 7.5/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a compelling empirical investigation into the limits of arbitrage and capital constraints using put-call parity violations in SPX and RUT options. It features robust out-of-sample statistical testing across multiple asset classes and horizon frequencies, backed by a solid no-arbitrage theoretical framework.

Research Flowchart

  flowchart TD
    A["Research Question: Is the Put-Call Parity Carry Gap (implied vs. OIS discount factors) driven solely by OIS rates or physical outside-option returns?"] --> B["Data Inputs: SPX/RUT options, OIS rates, and Global Asset Returns (FX, Equities, Commodities)"]
    B --> C["Methodology: Calculate Carry Gap (annualized P-C parity wedge) and decompose Global Assets into low-frequency return components"]
    C --> D["Empirical Modeling: Fit OIS baseline vs. Global Asset augmented models using nested horizon selection and dollar-neutralization"]
    D --> E["Validation: Evaluate in-sample and Leave-One-Year-Out (LOYO) out-of-sample R²"]
    E --> F["Key Outcome: Low-frequency global returns significantly boost OOS R², confirming P-Q alignment where carry gaps reflect physical opportunity costs"]