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Review of Quantitative Finance and Accounting

, Volume 52, Issue 4, pp 1119–1135 | Cite as

Relative option liquidity and price efficiency

  • Brian DuEmail author
Original Research
  • 71 Downloads

Abstract

Options trading can stimulate price efficiency in underlying stock markets by providing a platform for informed trades, increasing the production of information, and mitigating momentum arbitrage strategies and short-sale constraints. Using a large sample of 8146 firms with option trading from 1996 through 2014, this study examines the extent to which liquidity in option markets relates to the ability for stock prices to reflect all publicly available information. Variance ratio tests document that price efficiency monotonically increases across relative option liquidity deciles, proxied by the option-to-stock volume ratio, progressively becoming closer to random walk benchmarks. Evidence suggests that enhanced price efficiency is pronounced among small company stocks.

Keywords

Options Liquidity Price efficiency Variance ratio 

JEL Classification

G01 G13 G14 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.College of Business and EconomicsCalifornia State University, East BayHaywardUSA

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