Price Discovery in Stock and Options Markets
Society for Financial Studies (SFS) Cavalcade, 2016
54 Pages Posted: 15 Aug 2014 Last revised: 16 Jul 2018
Date Written: June 27, 2018
Using new empirical techniques—information leadership measures—we find that the role of options in price discovery is up to five times larger than previously thought. Approximately one-third of new information is reflected in option prices before being transmitted to stock prices, with options playing an even more important role in price discovery around information events. Using unique data on prosecuted insider trading, we validate our estimates and also find that one-third of the time informed traders choose to trade in options, with leverage being one of the main attractors. Our results help interpret conflicting findings in the existing literature.
Keywords: price discovery, stock, option, information share, insider trading
JEL Classification: G14
Suggested Citation: Suggested Citation