Is The Synthetic Stock Price Really Lower Than The Cash Price?

Previous literature shows a synthetic stock created using options is priced below the cash stock due to short-sale constraint on the underlying stock and lack of voting rights. This study finds that while the synthetic stock usually has a lower bid price than the cash stock for sellers, it also has a higher ask price for buyers in the sample from 2007 to 2012. Therefore, investors face worse prices in the synthetic stock market regardless of the trade direction as the synthetic spread contains the cash spread 95% of time. Arbitrage opportunities with over priced synthetic stock (Type E) is as likely as those with under priced synthetic stock (Type F) but the Type E arbitrage opportunities are more persistent and more profitable. Further analysis shows that in addition to short interest and voting rights, security liquidity, hedging costs, and investors' leverage preference also determine the relative price of the two securities. Finally, the innovation of the relative price predicts future returns in the opposite way for the synthetic and cash stocks, suggesting the previously documented return predictability of deviation from the put-call parity can not be fully explained by informed trading in the options market.