Journal Article Adjustment Costs in the Theory of Investment of the Firm Get access J. P. Gould J. P. Gould University of Chicago Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 35, Issue 1, January 1968, Pages 47–55, https://doi.org/10.2307/2974406 Published: 01 January 1968

The relationship between prices of puts and calls on securities that is suggested by the theory of efficient markets is developed and empirically tested in this paper. We find that the basic model is not supported unless rather large transactions costs are included. Moreover, the transactions costs that must be assumed to make the model consistent with the data are so large as to raise troublesome questions as to whether there were unexploited profit opportunities in the options market at least during the 1967–1969 period. We also find that similar deviations from the efficient market hypothesis have shown up in related work by other researchers but that their explanations of these results appear to be incorrect on theoretical grounds or too sanguine.