Stock Market Quality in the Presence of a Traded Option

41 Pages Posted: 19 Feb 2002

See all articles by Cyriel de Jong

Cyriel de Jong

Erasmus University Rotterdam (EUR) - Department of Financial Management; Erasmus Research Institute of Management (ERIM)

Kees C. G. Koedijk

Tilburg University - Department of Finance

Charles R. Schnitzlein

School of Business, University of Vermont

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

We use a controlled economic experiment to examine the implications of asymmetric information for informational linkages between a stock market and a traded call option on that stock. The setting is based on the Kyle model and Back (1993). We find that an insider trades aggressively in both the stock and the option, and that this leads to important feedback effects between the two markets: price discovery in the stock market also occurs in the option market and vice versa. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock, and volatility is lower. We argue that this provides new insights into how the introduction of a traded option improves the market quality of the underlying asset.

Keywords: Market microstructure, experimental economics, information asymmetry, financial derivatives

JEL Classification: D82, G15, G20

Suggested Citation

De Jong, Cyriel and Koedijk, Kees G. and Schnitzlein, Charles R., Stock Market Quality in the Presence of a Traded Option (January 2002). CEPR Discussion Paper No. 3173. Available at SSRN: https://ssrn.com/abstract=301086

Cyriel De Jong (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2300 (Phone)
+31 10 408 9017 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Charles R. Schnitzlein

School of Business, University of Vermont ( email )

Burlington, VT 05405
United States
802-656-9281 (Phone)

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