Is There Price Discovery in Equity Options?

57 Pages Posted: 22 Jan 2011 Last revised: 21 Aug 2011

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

John Paul Broussard

University of Oklahoma; Rutgers University; Estonian Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2011

Abstract

We use “tick-by-tick” quote data for 39 liquid U.S. stocks and options on them, and focus on events when the two markets disagree about the stock price in the sense that the option-implied stock price obtained from the put-call parity relation is inconsistent with the actual stock price. Option market quotes adjust to eliminate the disagreement, while the stock market quotes behave normally, as if there were no disagreement. The disagreement events are typically precipitated by stock price movements, and display signed option volume in the direction that tends to eliminate the disagreements. These results show that option price quotes do not contain economically significant information about future stock prices beyond what is already reflected in current stock prices, i.e. no economically significant “price discovery” occurs in the option market. We also find no option market price discovery using a much larger sample of disagreement events based on a weaker definition of a disagreement, which verifies that the findings for the primary sample are not due to unusual or unrepresentative market behavior during the put-call parity violations.

Keywords: Price Discovery, Equity Options, Market Microstructure, High Frequency Data, Put-Call Parity

JEL Classification: G14

Suggested Citation

Muravyev, Dmitriy and Pearson, Neil D. and Broussard, John Paul, Is There Price Discovery in Equity Options? (August 17, 2011). Available at SSRN: https://ssrn.com/abstract=1744954 or http://dx.doi.org/10.2139/ssrn.1744954

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Neil D. Pearson (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

John Paul Broussard

University of Oklahoma ( email )

Norman, OK 73019
United States
4053255591 (Phone)

HOME PAGE: http://https://www.ou.edu/price/finance/faculty/john-paul-broussard

Rutgers University ( email )

Camden, NJ 08102
United States
+18562256647 (Phone)

Estonian Business School ( email )

A. Lauteri 3
Tallinn, 10114
Estonia

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