Hedging efficiency in the Greek options market before and after the financial crisis of 2008

This study examines the hedging effectiveness of the emerging Greek options market before and after the financial crisis of 2008. We test the hypothesis of market efficiency by analyzing violations of FTSE/ASE-20 index option returns with respect to standard option theory, estimating option risk-premia, and testing the statistical significance of the returns to delta and delta–vega neutral straddles. Our empirical results suggest that, despite a certain level of mispricing, the Athens Derivatives Exchange maintained a relative level of efficiency before 2008. However, the economic crisis has had a significant impact on the Greek options market, as evidenced by more pronounced violations of theoretical predictions observed in option returns and risk-premia. These findings have direct implications for the risk management of international portfolios, since the feasibility and effectiveness of hedging exposure in Greek investments is found to have declined precisely when it is needed the most.

► The Greek options market remained relatively efficient before the financial crisis.
► The price-efficiency of Greek options decreased significantly during the crisis.
► Liquidity in the Greek options market decreased dramatically after 2008.
► Firms’ ability to hedge Greek investments was impaired when it was needed the most.