The P behind Q: Empirical Evidence from Physical Drift in Put-Call Parity

2026/05/12 by Useong Shin · 1 voice
Economics, Econometrics and Finance · #q-fin.GN

paper · pdf

arxiv published 2026/05/12 · arxiv updated 2026/05/24

Abstract

Put-call parity is a terminal-payoff identity, but its enforcement is capital-using. I study the carry gap, the annualized wedge between option-implied and OIS discount factors, in SPX and RUT index options. Quoted parity is tightly compressed, while the synthetic-traded forward channel leaves a systematic wedge. I interpret this wedge as an implementation premium under finite arbitrage capital. A drift-preserving GBM term, r μ-hat τ, improves in-sample and leave-one-year-out fit, especially in SPX. The evidence suggests that physical drift enters not option payoffs, but the process enforcing risk-neutral parity.

Citations

• Market Liquidity and Funding Liquidity
• The Limits of Arbitrage
• The Pricing of Options and Corporate Liabilities

Discussions

• Useong Shin: The P behind Q: Empirical Evidence from Physical Drift in Put-Call Parity https://arxiv.org/abs/2605.12250 https://arxiv.org/pdf/2605.12250 https://arxiv.org/html/2605.12250 [bsky, 0 points, 0 comments]

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