Abstract

http://ssrn.com/abstract=2325714
 


 



Price Discovery Across Equity and Option Markets


Hayden Kane


University of Arizona - Eller College of Management

September 4, 2014


Abstract:     
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 and I find that options markets play an important role in the price discovery process. When conditioning on option caused mispricing events, the equity price adjusts towards the options price to reconcile the prices. I find that around 40% of the option caused mispricing events contain information, and the equity prices adjust 35-40%, depending on the exchange, of the maximum discrepancy before prices reconcile. When the equity market causes the mispricing, the option market follows due to the autoquote mechanism. Additionally, I use Monte Carlo to assess the suitability of the Hasbrouck (1995) Information Share and Gonzalo-Granger (1995) Component Share measures in the option-equity context. I find that neither metric is suitable, however the Putnins (2013) Information Leadership metric is and the options market has on average a 35% information leadership share.

Number of Pages in PDF File: 57

Keywords: Options, Price Discovery, Market Microstructure

JEL Classification: G14

working papers series





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Date posted: September 15, 2013 ; Last revised: September 12, 2014

Suggested Citation

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 4, 2014). 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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