Stock market quality in the presence of a traded option

    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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