Noise Traders, Mispricing, and Price Adjustments in Derivatives Markets

32 Pages Posted: 19 Jan 2019

See all articles by Doojin Ryu

Doojin Ryu

Sungkyunkwan University

Heejin Yang

Sungkyunkwan University; Soongsil University

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2019

Abstract

This study examines price disagreements and adjustments between actual futures prices and options-implied futures prices in an elaborate setting. We identify which market triggers each type of price disagreement and find that the market that initiates the disagreement adjusts more to eliminate the mispricing. Futures prices adjust less for options-initiated price disagreement events with out-of-the-money (OTM) options-implied prices than they do for events with at-the-money (ATM) prices. Options markets adjust more for disagreements initiated by OTM options than they do for disagreements initiated by ATM options. Adjustments in both the futures and options markets consistently suggest the information inferiority of OTM options trading. We also find that price disagreements are positively correlated with the participation of domestic investors, especially for OTM options-initiated disagreement events, implying that domestic traders are noisier and more uninformed than foreign investors are.

Keywords: cost-of-carry; domestic investor; market efficiency; noise trading; price adjustment; price disagreement; put-call parity

JEL Classification: G13; G14; G15

Suggested Citation

Ryu, Doojin and Yang, Heejin and Yang, Heejin, Noise Traders, Mispricing, and Price Adjustments in Derivatives Markets (January 10, 2019). Available at SSRN: https://ssrn.com/abstract=3313163 or http://dx.doi.org/10.2139/ssrn.3313163

Doojin Ryu

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Heejin Yang (Contact Author)

Soongsil University ( email )

511, Sangdo-dong, Dongjak-gu
Seoul
Korea, Republic of (South Korea)

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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