Put-Call Parity Violations and Market Frictions in China's SSE 50 ETF Options Market: Evidence from the AI Boom of 2023

Main Article Content

Yijia Sun
Faculty of Arts & Humanities, University College London, London, UK

DOI: https://doi.org/10.70267/icrafm.202617459467

Keywords

put-call parity, option mispricing, SSE 50 ETF options, investor sentiment, market frictions

Abstract

This paper empirically investigates the deviation of the put - call parity (PCP) in China's SSE 50ETF options market (510050 XSHG) for the whole year of 2023-when the release of ChatGPT triggered an unprecedented investor sentiment hype of artificial intelligence. Based on 15,604 pairs of matched call-put options covering all 242 trading days, we detected that there was always a systematic and persistent overpricing of calls over put options. We interpret this phenomenon as follows: The explosive market demand by retail investors on call options-a leveraged sentiment on AI-related market bullishness-out-weighted the arbitrage capacity of constrained arbitrageurs by market frictions to make corrections to the mispricing through a reverse arbitrage strategy (selling call options, buying put options, and buying spot options). Using quarterly dummy variables as proxies for AI market sentiment cycle, we found that by controlling time stage variables, the R² rose from 8.9% to 71.67% to confirm that demand dynamics driven by market sentiment rather than the specific features of contracts-are the primary drivers for the variability in the PCP violation phenomena. Compared with the baseline of AI craze hype in the first quarter, the quarterly effect shows monotonically decreasing, while the implied residuals bias the fourth quarter, which is still a positive one. Confirmed is that the permanent structural friction lower limit will persist even after the sentiment premium of AI fades. Our research result provides fresh evidence in terms of behavioral demand shocks' interaction with the institutional friction on in emerging markets, thereby creating option price biases.

Abstract 36 | PDF Downloads 16

References

  • [1]Stoll, H. R. (1969). The relationship between put and call option prices. Journal of Finance, 24(5), 801–824.
  • [2]Leland, H.E. (1985) Option Pricing and Replication with Transaction Costs. Journal of Finance, 40(5), pp.1283–1301.
  • [3]Jouini, E. and Kallal, H. (1995) Martingales and Arbitrage in Securities Markets with Transaction Costs. Journal of Economic Theory, 66(1), pp.178–197.
  • [4]Kamara, A., & Miller, T. W. (1995). Daily and intradaily tests of European put-call parity. Journal of Financial and Quantitative Analysis, 30(4), 519–539.
  • [5]Nisbet, M. (1992). Put-call parity theory and an empirical test of the efficiency of the London traded options market. Journal of Banking & Finance, 16(2), 381–403.
  • [6]Xia, Z. (2019). The impact of asymmetric transaction costs on the SSE 50 ETF options market [Doctoral dissertation, Shanghai Jiao Tong University].
  • [7]Han, B. (2008). Investor sentiment and option prices. Review of Financial Studies, 21(1), 387–414.
  • [8]Bollen, N. P. B., & Whaley, R. E. (2004). Does net buying pressure affect the shape of implied volatility functions? Journal of Finance, 59(2), 711–753.
  • [9]Garleanu, N., Pedersen, L. H., & Poteshman, A. M. (2009). Demand-based option pricing. Review of Financial Studies, 22(10), 4259–4299.
  • [10]Diamond, D. W., & Verrecchia, R. E. (1987). Constraints on short-selling and asset price adjustment to private information. Journal of Financial Economics, 18(2), 277–311.
  • [11]Li, X., Du, J., & Hu, Z. (2014). Short-selling restrictions and stock market efficiency: Evidence from China. Economic Research Journal, 49(10), 147–159.
  • [12]Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance, 61(4), 1645–1680.
  • [13]Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention. Journal of Finance, 66(5), 1461–1499.
  • [14]Fang, H., Wen, F., & Zhang, Y. (2022). Investor attention and the implied volatility smile: Evidence from China. International Review of Financial Analysis, 79, 101977.
  • [15]Huang, D., Jiang, F., Tu, J., & Zhou, G. (2015). Investor sentiment aligned: A powerful predictor of stock returns. Review of Financial Studies, 28(3), 791–837.

Article Sidebar

Full Text
PDF
Information
Copy Publication Information
Published
Oct 19, 2026
Conference Proceedings Volume
Vol. 17 (2026): Proceedings of the International Conference on Research in Accounting, Finance and Management (ICRAFM 2026)
Section
Articles
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

How to Cite

Sun, Yijia. “Put-Call Parity Violations and Market Frictions in China’s SSE 50 ETF Options Market: Evidence from the AI Boom of 2023”. Exploring Science Academic Conference Series, vol. 17, Oct. 2026, pp. 459-67, https://doi.org/10.70267/icrafm.202617459467.