Co-Movements of Index Options and Futures Quotes

Dice Center Working Paper Series No. 2005-10

Journal of Empirical Finance, Forthcoming

27 Pages Posted: 15 Apr 2005 Last revised: 8 Aug 2008

See all articles by Rüdiger Fahlenbrach

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Patrik Sandas

University of Virginia; Centre for Economic Policy Research (CEPR)

Date Written: June 1, 2008


We report evidence that the co-movements of index options and index futures quotes differ sharply from perfect correlation in periods with option trades. In half-hour intervals with (without) option trades 25% (12%) of call option quote changes have either the opposite sign or are larger in magnitude than the corresponding index futures quote changes. We calibrate a stochastic volatility model that allows for trade and no-trade periods using real data and simulate the joint co-movements of index quotes and option quotes in this model. We show that for trade intervals the observed co-movements differ from the benchmark case established by our simulations approximately three times too often. We provide empirical evidence that market microstructure effects - specifically, stale quotes and aggressive quotes - explain the majority of the deviations from the benchmark. Our findings are relevant for techniques that use estimates of local co-movements as inputs to price or hedge options.

Keywords: Options, Frictions, Market Microstructure, Stale Quotes, Market and Limit Orders

JEL Classification: G13, G14, C33

Suggested Citation

Fahlenbrach, Rüdiger and Sandas, Patrik Vilhelm, Co-Movements of Index Options and Futures Quotes (June 1, 2008). Dice Center Working Paper Series No. 2005-10, Journal of Empirical Finance, Forthcoming, Available at SSRN: or

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)

HOME PAGE: http://

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Patrik Vilhelm Sandas

University of Virginia ( email )

McIntire School of Commerce
Monroe Hall, FL 2
Charlottesville, VA 22904-4173
United States
434-243-2289 (Phone)

Centre for Economic Policy Research (CEPR)

United Kingdom

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