Price Discovery in Stock and Options Markets

Journal of Financial Markets, Forthcoming

55 Pages Posted: 15 Aug 2014 Last revised: 4 Jan 2020

See all articles by Vinay Patel

Vinay Patel

University of Technology Sydney (UTS)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Sean Foley

Macquarie University

Date Written: August 13, 2019

Abstract

Using new empirical measures of information leadership, we find that the role of options in price discovery is up to five times larger than previously thought. Approximately one-quarter of new information is reflected in options prices before being transmitted to stock prices, with options playing a more important role in price discovery around information events. Using unique data on prosecuted insider trading, we find that insider traders often choose to trade in options, attracted by their leverage, and when they do the options share of price discovery is higher. Our results help interpret conflicting findings in the existing literature.

Keywords: price discovery, stock, option, information share, insider trading

JEL Classification: G14

Suggested Citation

Patel, Vinay and Putnins, Talis J. and Michayluk, David and Foley, Sean, Price Discovery in Stock and Options Markets (August 13, 2019). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2480870 or http://dx.doi.org/10.2139/ssrn.2480870

Vinay Patel (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Sean Foley

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia
0417702600 (Phone)

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