Tuning in to Frequencies: How Global Assets Align with U.S. Put-Call Parity Residuals

TL;DR

This paper investigates how global asset prices align with U.S. put-call parity residuals, revealing that physical-measure investment opportunities influence parity enforcement beyond arbitrage failures.

Contribution

It demonstrates that finite-capital parity enforcement is driven by physical-measure investment opportunities rather than arbitrage failures, supported by empirical analysis.

Findings

Adding IEFA, IGOV, and IAU improves model fit.

Results hold under various robustness checks.

Parity enforcement reflects physical-measure investment opportunities.

Abstract

Put-call parity is risk-neutral at terminal payoff, but its enforcement is path-dependent and capital-using. I test whether the SPX and RUT carry gap is explained by OIS-based funding, volatility, trading-friction, and financial-condition variables, or also by residual outside-option information. Adding IEFA, IGOV, and IAU improves in-sample and leave-one-year-out fit after U.S.-centered controls. Gains survive broad-dollar neutralization, alternative blocks, PCA, residualization, and nested horizon selection. Results support reduced-form P-Q alignment: finite-capital parity enforcement reflects physical-measure investment opportunities, not payoff-level no-arbitrage failure.