Lead Lag Direction and Price Discovery of the S&P/ASX 200 Share Price Index and the S&P/ASX 200 Index Options

50 Pages Posted: 27 Aug 2007

See all articles by Klaus Buhr

Klaus Buhr

Massey University - School of Economics and Finance; UNITEC Institute of Technology

Lawrence C. Rose

Massey University

Xiaoming Li

Massey University - School of Economics and Finance (Albany)

Date Written: August 24, 2007

Abstract

We examined the lead-lag relationship between the S&P/ASX200 Share Price Index as the underlying security of the S&P/ASX 200 Index Options traded on the ASX.

We investigated the information content of the index and option markets in the price discovery process. Based on conditional volatility models results, the long run equilibrium relationship between the share price index, the implied price of the share-price-index option was investigated. Causality was determined to show which market leads the other. Information share measures were used to gauge the contribution of the share price index and index option markets to the price discovery process. Unambiguous evidence shows the index market leads the option market and the former contributes more to price discovery than the latter.

Keywords: Causality, error correction, price discovery

JEL Classification: C22, C32, G14, G15

Suggested Citation

Buhr, Klaus and Rose, Lawrence (Larry) Craig and Li, Xiaoming, Lead Lag Direction and Price Discovery of the S&P/ASX 200 Share Price Index and the S&P/ASX 200 Index Options (August 24, 2007). 20th Australasian Finance & Banking Conference 2007 Paper. Available at SSRN: https://ssrn.com/abstract=1009328 or http://dx.doi.org/10.2139/ssrn.1009328

Klaus Buhr (Contact Author)

Massey University - School of Economics and Finance ( email )

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UNITEC Institute of Technology ( email )

School of Accountancy, Law and Finance
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Lawrence (Larry) Craig Rose

Massey University ( email )

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Xiaoming Li

Massey University - School of Economics and Finance (Albany) ( email )

Private Bag 102904
North Shore
Auckland, 0745
New Zealand
+64 9 4140800 ext. 43177 (Phone)
+64 9 441 8177 (Fax)

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