EFFICIENCY AND ARBITRAGE OPPORTUNITIES IN THE FINNISH COVERED WARRANTS MARKET

Abstract

The purpose of this thesis is to investigate whether the Finnish covered warrants market is efficient. The main motivations for a study are size of the Finnish market and lack of the empirical research of the efficiency from the Finnish derivatives and especially covered warrants market. The methodology is based on model-free tests of no-arbitrage relationship. The lower boundary conditions for calls and the put-call parity tests are conducted via ex-post. Tests are carried out by both closing prices and closing bid and ask quotes.

For the empirical study, the data consist of daily closing prices and closing bid and ask quotes for put and call covered warrants traded on Nokia in period from 2 June 2006 to 29 December 2006.

The ex-post results show that certain degree of possible arbitrage opportunities exist in the market especially in put-call parity tests. However, transaction costs and bid ask spread diminished such opportunities quite low level. Overall, the result provides support for the hypotheses that options market efficiency has been improved over time and results indicate that the Finnish covered warrants market is efficient at lest in weak form although only ex-posts tests are conducted.