The efficiency of stock and options markets: tests based on 1992 UK election opinion polls

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Abstract
The efficiency of stock and options markets in London during the 1992 election is examined. The study updates Gemmill's 1992 study of the efficiency of the London stock and options markets during the 1987 election. A close relationship is found between the opinion polls and the FTSE100 share index, while the prices of FTSE100 index options do not follow the polls as closely. The results indicate that the stock market was semi-strong efficient at this time. The level of inefficiency in the options market, however, was found to be insufficient to allow a profitable riskless arbitrage, after allowing for transactions costs. Our results demonstrate that the FTSE100 index options market was markedly more efficient in 1992 than 1987. A possible reason for this may be the increased liquidity resulting from higher trading volumes in index options.