Long memory and the relation between options and stock prices

This study investigates the long-memory property and the fractionally cointegration between absolute changes in observed stock prices and implied stock prices from option pricing model. We find a stylized fact that absolute price movements in stock and option markets are characterized by long memory...

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Bibliographic Details
Published in:Finance research letters 2015-02, Vol.12, p.77-91
Main Authors: Huang, Teng-Ching, Tu, Yu-Chen, Chou, Heng-Chih
Format: Article
Language:English
Subjects:
Cointegration analysis
Econometrics
Fractional cointegration
Information effect
Long memory
NBLS formula
Options markets
Securities prices
Stock prices
Studies
Volume effect
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Summary:This study investigates the long-memory property and the fractionally cointegration between absolute changes in observed stock prices and implied stock prices from option pricing model. We find a stylized fact that absolute price movements in stock and option markets are characterized by long memory and they present a fractionally cointegrated relation. The option prices appear to be valuable for the stock prices based on an appropriate econometric methodology, which captures the persistence of both price series. Our empirical results also support the presence of information effect in call option, but the volume effect is absent for all cases.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2014.11.005