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

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

University of Sydney Business School

Date Written: June 27, 2018

Abstract

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

Patel, Vinay and Putnins, Talis J. and Michayluk, David and Foley, Sean, Price Discovery in Stock and Options Markets (June 27, 2018). Society for Financial Studies (SFS) Cavalcade, 2016. 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

University of Sydney Business School ( email )

Sydney
Australia

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