Price discovery in the U.S. stock and stock options markets: A portfolio approach
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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.
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- Price discovery in the U.S. stock and stock options markets: A portfolio approach
Review of Derivatives Research
Volume 9, Issue 1 , pp 37-65
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers-Plenum Publishers
- Additional Links
- Price discovery
- Put-call parity
- Automated quoting
- Options trade
- Industry Sectors
- Author Affiliations
- 1. Zicklin School of Business, Baruch College, One Bernard Baruch Way, Box H125, New York, NY, 10010, USA
- 2. Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, USA
- 3. Zicklin School of Business, Baruch College, One Bernard Baruch Way, Box B10-225, New York, NY, 10010, USA