Price Discovery Across Equity and Option Markets

Hayden Kane

University of Arizona - Eller College of Management

September 13, 2013

This paper measures the channels by which private information is incorporated in prices in the equity and option markets. Using a mispricing events approach and conditioning on the option market being the cause of the mispricing event, I analyse the subsequent behaviour of both the options and equity markets. I find that options markets play an important role in the price discovery process. When conditioning on mispricing events caused by the option market, the equity price adjusts towards the options price to reconcile the prices. When the equity market causes the mispricing, the option market follows due to the autoquote mechanism that is used. Additionally, I use Monte Carlo to assess the suitability of the Hasbrouck (1995) information share measure to identify the price discovery roles each of the equity and options markets play, and find that research design choices that are not sensitive to actual market structures can distort the importance this measure assigns option market.

Keywords: Options, Price Discovery, Market Microstructure

JEL Classification: G14

working papers series

Not Available For Download

Date posted: September 15, 2013 ; Last revised: November 27, 2013

Suggested Citation

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 13, 2013). Available at SSRN: http://ssrn.com/abstract=2325714 or http://dx.doi.org/10.2139/ssrn.2325714

Contact Information

Hayden Kane (Contact Author)
University of Arizona - Eller College of Management ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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