The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets

2026/04/21 by Useong Shin · 1 voice
Economics, Econometrics and Finance · #q-fin.GN #q-fin.CP

paper · pdf

arxiv published 2026/04/21 · arxiv updated 2026/05/24

Abstract

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.

Citations

• Market Liquidity and Funding Liquidity
• The Limits of Arbitrage

Discussions

• Useong Shin: The Cost of a Free Lunch: Evidence from U.S. Derivatives Markets https://arxiv.org/abs/2604.19604 https://arxiv.org/pdf/2604.19604 https://arxiv.org/html/2604.19604 [bsky, 0 points, 0 comments]

Related

• The P behind Q: Empirical Evidence from Physical Drift in Put-Call Parity
• Tuning in to Frequencies: How Global Assets Align with U.S. Put-Call Parity Residuals
• Time-independent pricing of options in range bound markets
• Risk-Neutral Densities: A Review
• Option-Implied Zero-Coupon Yields: Unifying Bond and Equity Markets