Title

Stock market quality in the presence of a traded option

Authors

Authors

C. de Jong; K. G. Koedijk;C. R. Schnitzlein

Comments

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Abbreviated Journal Title

J. Bus.

Keywords

INFORMATIONAL EFFICIENCY; ASYMMETRIC INFORMATION; EMPIRICAL-ANALYSIS; UNDERLYING STOCKS; ASSET MARKETS; VOLATILITY; SECURITY; RETURNS; IMPACT; Business

Abstract

We use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option. We find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated. 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 provide evidence that the introduction of an option improves market quality in the underlying asset.

Journal Title

Journal of Business

Volume

79

Issue/Number

4

Publication Date

1-1-2006

Document Type

Article

Language

English

First Page

2243

Last Page

2274

WOS Identifier

WOS:000240164500019

ISSN

0021-9398

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