Stock Market Quality in the Presence of a Traded Option

We use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option. We find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated. The time series proper...

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Bibliographic Details
Published in:The Journal of business (Chicago, Ill.) Ill.), 2006-07, Vol.79 (4), p.2243-2274
Main Authors: Jong, Cyriel de, Koedijk, Kees G., Schnitzlein, Charles R.
Format: Article
Language:English
Subjects:
Asymmetric information
Economic models
Error rates
Financial models
Financial research
Liquidity
Market periods
Market prices
Option pricing
Options markets
Options on stocks
Options trading
Price efficiency
Securities markets
Stock markets
Stock prices
Studies
Time series
Trade
Volatility
Zero
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Summary:We use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option. We find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock and volatility is lower. We provide evidence that the introduction of an option improves market quality in the underlying asset.
ISSN:0021-9398
1537-5374
DOI:10.1086/503662