Review of Derivatives Research

, Volume 9, Issue 1, pp 37–65

Price discovery in the U.S. stock and stock options markets: A portfolio approach

Article

DOI: 10.1007/s11147-006-9004-0

Cite this article as:
Holowczak, R., Simaan, Y.E. & Wu, L. Rev Deriv Res (2006) 9: 37. doi:10.1007/s11147-006-9004-0

Abstract

Option prices vary with not only the underlying asset price, but also volatilities and higher moments. In this paper, we use a portfolio of options to seclude the value change of the portfolio from the impact of volatility and higher moments. We apply this portfolio approach to the price discovery analysis in the U.S. stock and stock options markets. We find that the price discovery on the directional movement of the stock price mainly occurs in the stock market, more so now than before as an increasing proportion of options market makers adopt automated quoting algorithms. Nevertheless, the options market becomes more informative during periods of significant options trading activities. The informativeness of the options quotes increases further when the options trading activity generates net sell or buy pressure on the underlying stock price, even more so when the pressure is consistent with deviations between the stock and the options market quotes.

Keywords

Price discoveryOptionsStocksPut-call parityAutomated quotingOptions trade

Copyright information

© Springer Science+Business Media, LLC 2006

Authors and Affiliations

  • Richard Holowczak
    • 1
  • Yusif E. Simaan
    • 2
  • Liuren Wu
    • 3
  1. 1.Zicklin School of BusinessBaruch College, One Bernard Baruch WayNew YorkUSA
  2. 2.Graduate School of BusinessFordham UniversityNew YorkUSA
  3. 3.Zicklin School of BusinessBaruch College, One Bernard Baruch WayNew YorkUSA