Why Option Prices Lag Stock Prices: A Trading-based Explanation

While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spur...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of finance (New York) 1993-12, Vol.48 (5), p.1957-1967
Main Authors: CHAN, KALOK, CHUNG, Y. PETER, JOHNSON, HERB
Format: Article
Language:English
Subjects:
Arbitrage
Asked price
Call options
Coefficients
Economic models
Financial leverage
Hypotheses
Market prices
Mathematical constants
Options contracts
Options markets
Options trading
Price changes
Prices
Put options
Securities prices
Shorter Papers
Stock prices
Stocks
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1993.tb05136.x