The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets
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arXiv
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| Format: | Preprint |
| Publié: |
2026
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| _version_ | 1866914596160274432 |
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| author | Shin, Useong |
| author_facet | Shin, Useong |
| contents | 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. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2604_19604 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets Shin, Useong General Finance Computational Finance 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. |
| title | The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets |
| topic | General Finance Computational Finance |
| url | https://arxiv.org/abs/2604.19604 |