A test of the efficiency of the European Options Exchange

This study provides further evidence on the efficiency of the stock options market of the European Options Exchange. Efficiency is defined as the inability of any trader to consistently generate an above-normal average rate of return after transactions costs. A hedge trading strategy is used to determine whether above-normal average rates of return are possible. An earlier study, van der Hilst (Marktefficiency op de EOE te Amsterdam, in Financing en Belegging, stand van zaken anno 1980, Ballendux, F. J. (ed.), Erasmus Universieeit, Rotterdam, pp. 128–38), used a hedging strategy and found the market to be less than perfectly efficient. However, transactions costs were ignored in that study. The results of this study show that while there are abnormal profit opportunities before taking into account transactions costs, these profit opportunities are eliminated when one component of transactions costs, the bid-ask spread, is taken into account.