order flow transaction clock and normality of asset returns the goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change clark 1973 addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator we extend clark s results and find the following i stochastic time changes are mathematically much less constraining than subordinators ii the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns iii this clock can be modeled nonparametrically allowing both the time change and price processes to take the form of jump diffusions the relations among trading volume stock prices and price volatility the subject of empirical and theoretical studies over many years have lately received renewed attention with the increased availability of high frequency data a vast amount of research has focused on issues such as news arrivals volume and price changes or volatility moves usually outside any framework of general or even partial equilibrium is the normality of returns a key issue for example in the mean variance paradigm for portfolio choice or the recent study of the problems of risk management e g in value at risk verified at any time horizon the evidence accumulated from a number of studies that document the presence of leptokurtosis and skewness in the distribution of returns of a wide variety of financial assets suggests that the answer is no studies as early as for example fama 1965 showed that daily returns are more long tailed than the normal density with the distribution of returns approaching normality as the holding period is extended to one month in the same manner volatility smiles and other observed

the behavior of option price around large block transactions in the underlying security this paper investigates the behavior of stock and option prices around block trades in stocks the results indicate that for both uptick and downtick block trades the stock prices adjust within a fifteen minute period after the block trade moreover for uptick blocks there is no evidence of any stock price reaction before the block trade however the adjustment of stock price for downtick blocks begins about fifteen minutes before the block trade we also find that option price behavior differs considerably from stock price behavior specifically our results suggest that options exhibit abnormal price behavior starting thirty minutes before the block and ending one hour after the block the pattern is more pronounced for downtick blocks and for put options we interpret this abnormal price behavior of options before the block trade as consistent with intermarket frontrunning this paper compares the price effect of block transactions in the stock market with the price effect in the derivative options market the analysis is motivated by the suggestion in the literature that options provide a superior investment vehicle because of their inherent leverage and lower transaction costs and because of their ability to avoid stock market restrictions on short sales this implies that informed investors may prefer to trade in options thereby causing the option market to lead the stock market

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

put call parity and expected returns this study examines the hypothesis that in the presence of market frictions relative put and call prices contain information concerning future returns of the underlying asset a measure of relative prices is derived from the put call parity relationship for index options and applied to a three year sample of oex option transactions the results show that the measure of relative index option prices leads the stock market by at least 15 minutes

the interrelation of stock and options market trading volume data this research empirically investigates the relation between common stock and call option trading volumes the paper hyothesizes and tests a sequential flow of information between the stock and option markets if information trading for cboe listed firms is predominantly accomplished through option trading then existing research methodologies may be biased against finding any significant economic consequences in those instances where option listing is an important variable results indicate that trading in call options leads trading in the underlying shares with a one day lag black 2 suggests that information traders may prefer trading in options rather than shares due to economic incentives provided by reduced transaction costs capital requirements and trading restrictions and due to the greater action afforded by option trading manaster and rendleman 12 empirically support black s 2 option information trading preference finding incremental information content in option prices up to twenty four hours prior to its reflection in stock prices jennings and starks 10 report that the stock price adjustment process upon arrival of new information differs for those firms listed on the chicago board option exchange cboe and they demonstrate that stock price adjustment to new information occurs more rapidly for firms with listed call options the results in both papers appear to warrant consideration of an optiontrading variable in the design of empirical tests both manaster and rendleman 12 and jennings and starks 10 investigate the price relation between shares and call options this paper investigates trading volume copeland 4 posits the use of trading volume as a proxy for the rate of information arrival he concludes that the relation between absolute value of price changes and volume is positive and linear if one accepts a sequentialinformation arrival hypothesis as valid the present research hypothesizes and tests a sequential flow of information between the stock and option markets analyses presented are based on econometric tests for causality1 derived from the works of granger 6 and sims 22 if information trading takes place

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

a note on the impact of options on stock return volatility abstract this paper measures the impact of option introductions on the return variance of underlying stocks past research generally finds a significant reduction in stock return variance following the listing of options through 1986 using a more extensive sample i compare changes in the return variance of optioned stocks to changes in the return variance of a control group since the average change in the control group is statistically indistinguishable from the average change in the optioned stocks i conclude that option introductions do not significantly affect stock return variance

efficient selection of insured currency positions protective puts vs fiduciary calls we examine the empirical results from implementation of portfolio insurance strategies employing currency spot and futures options hypotheses are generated from ogden and tucker s 1988 generalizations concerning the relative values of american spot currency options and currency futures options we find that protective puts using futures options are generally dominated by both protective puts that use options on spot currencies and by fiduciary calls on futures contracts this suggests that the prices of puts on foreign currency futures contracts are too high relative to foreign currency futures calls and to puts on spot currencies

some evidence on selecting an intermediate target for monetary policy the purpose of monetary policy is to influence the evolution of the economy this influence may be expressed in the oft heard phrases of reducing inflation promoting real economic growth and lowering unemployment these are the goals of policy action how are these goals to be achieved the federal reserve is limited in its power in that there are only a few policy vehicles over which it exercises dominance although the main policy instrument of the fed has differed over time during the past few decades fed policy has been exerted primarily through its control of the banking system s reserves via open market operations the difficulty faced by the policymaker is to know just what effect the changes in the instruments are having on the economy since data on the goal variables generally are received with a lag it is useful to find an intermediate variable that is more timely in its availability and that acts as a good proxy for the goal variable in other words changes in the intermediate variable should reliably predict changes in the goal measure if however a measure is unduly influenced by the goal variable then its usefulness in policy decisions is diminished greatly this is because movements in the intermediate measure might emanate from policy actions from changes in the goal measure or both for a measure to be useful as an intermediate target therefore it should have the feature of being exogenous or causally prior to the goal variable in addition to having minimal feedback from the goal measure the intermediate target measure also should respond predictably to changes in the direction of policy for example an intermediate target that responds randomly to changes in the policy instrument

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

large option trades market makers and limit orders this article focuses on the difference between market makers and limit orders in their role as suppliers of liquidity for both sources of liquidity i analyze the price behavior of stocks and options around large option trades and i estimate the premium paid by the initiator of the large trade my findings suggest that limit orders for options are picked off after adverse changes in the underlying stock price furthermore i find that for these transactions there is a permanent change in quotations in the direction of the transaction after transactions where market makers supply liquidity quotes tend to return to their pretrade level article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

information transmission and market interactions across the atlantic an empirical study on the natural gas market abstract this paper studies the international information transmission and market interactions in the u s and u k natural gas markets three well documented approaches are used to measure the relative importance on the process of price discovery under a quadvariate system after adjusting the effects of nonsynchronous trading prices robust results indicate our system that includes spot and futures prices within the two countries are driven by one common factor information disseminates efficiently among the four markets concerned the u s futures market dominates as the center for price discovery the u k futures market comes as the second the spot markets in the u s and u k are less efficient than their corresponding futures market where the u k spot market contributes the least and almost zero to the price discovery process asymmetric volatility spillovers are found in three of the four markets volatility in the u s futures market increases with positive returns which illustrates the inverse leverage effect in most of the commodity market volatilities in the spot markets are negatively related to returns which is analogous to the traditional leverage effect prevailing in most of the equity stock markets

hugging trees claiming de facto property rights by blockading resource use this paper explores conflicts between two groups the industry and theenvironmentalists over whether an indivisible resource e g an ancient tree should be harvested or preserved in a complete information war ofattrition the environmentalists willingness to blockade harvest attemptsmay control resource use as effectively as if they held property rights optimal government intervention will override this ability for somebenefit cost combinations but may augment it for other combinations introducing uncertainty about the environmentalists benefits results inextended disputes and consequent lack of efficiency governmentintervention for welfare reasons generally reduces these efficiencylosses

stealth trading in options markets we investigate how price discovery occurs in the options markets through traders trade size choice by employing transactions data on all options traded on a sample of 100 firms we show that informed traders fragment their orders into small medium trades for low high volume contracts we also find that almost 60 of the price discovery occurs in the exchange with the largest market share for a given option where informed traders favor medium size trades upon examining distinct option series for a given stock we find that at the money calls display the highest information share

one market stocks futures and options during october 1987 we provide new evidence regarding the degree of integration among markets for stocks futures and options prior to and during the october 1987 market crash where previous analyses have resulted in recommendations for the implementation of circuit breakers the coordination of margin requirements across markets and changes in regulatory jurisdiction our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders the results suggest that market integration may be better served by efficient order execution than by further restricting markets

a further analysis of the lead lag relationship between the cash market and stock index futures market the intraday lead lag relation between returns of the major market cash index and returns of the major market index futures and s p 500 futures is investigated empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures the asymmetric lead lag relation holds between the futures and all component stocks including those that trade in almost every five minute interval evidence indicates that when more stocks move together market wide information the futures leads the cash index to a greater degree this suggests that the futures market is the main source of market wide information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

s p 100 index option volatility using transaction data on the s p 100 index options we study the effect of valuation simplifications that are commonplace in previous research on the timeseries properties of implied market volatility using an american style algorithm that accounts for the discrete nature of the dividends on the s p 100 index we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level negative serial correlation is also induced by a bid ask price effect if a single option is used to estimate implied volatility in addition we find that these same effects induce spurious and unreasonable negative cross correlations between the changes in call and put implied volatility an important area of current research is the estimation and behavior of market volatility implied by option pricing models for example stein 1989 concludes that the s p 100 index option market is inefficient because longer term options overreact to changes in the implied volatility of short maturity options day and lewis 1988 document an increase in volatility around the quarterly expiration cycle schwert 1990 draws conclusions about the behavior of volatility around the stock market crash of 1987 by using implied volatility all of these studies use a simplified option pricing framework to estimate implied market volatility previous research generally assumes that the s p 100 index option is european style this option is actually american style it is also common to assume that the dividend yield is constant the dividends are not constant and exhibit distinct seasonal patterns harvey and whaley 1991b show that large pricing errors can be induced in the option prices if the american feature and the discrete dividends are ignored option pricing errors translate into errors in the implied volatility estimates this paper uses s p 100 index call and put transactions and an american style option pricing model with the exact discrete dividend series to calculate a time series of implied volatilities this valuation method

a characterization of the daily and intraday behavior of returns on options the daily and intraday behavior of returns on chicago board options exchange options is examined option returns contain systematic patterns even after adjusting for patterns in the means and variances of the underlying assets this is consistent with the hypothesis that informed trading in options can make the order flow in the options market informative about the value of the underlying asset making options nonredundant the intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and discretionary liquidity traders this paper examines the daily and intraday behavior of returns on options we have two goals our first objective is to identify systematic patterns in the means and variances of daily and intraday returns on options our second objective is to decompose option returns into patterns that are related to the means and variances of the underlying stocks and by inference those patterns that are independent of patterns in the means and variances of the underlying assets 1 our work is important for a number of reasons first options have become as important as common stocks yet there is no detailed investigation of the behavior of returns on options second it is important to identify similarities and differences in return patterns across different securities and market structures an understanding of these similarities and differences would allow us to develop better models of returns that capture these properties closely related to this it is instructive to examine option returns in light of the partial equilibrium models we use to value them specifically are the return patterns in options driven exclusively by the underlying stocks or do option returns contain patterns of their own identifying independent yet similar patterns in options returns may lead to an identification of factors that are common across two different market structures the new york

why option prices lag stock prices a trading based explanation while many studies find that option prices lead stock prices stephan and wvhaley 1990 find that stocks lead options we find no evidence that options even deep out of the money options lead stocks after confirming stephan and whaley s results we show their results can be explained as spurious leads induced by infrequent trading of options we show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices hence we find no evidence of arbitrage opportunities associated with the stock lead in a perfect market price discrepancies should be instantly arbitraged away in particular option prices should neither lead nor lag stock prices in real markets only very short leads should occur traders with private information who are confident that their information is valid and that they will not be detected generally want highly leveraged positions to exploit their advantage thus we might expect options with their greater leverage to lead stocks if information trading is important manaster and rendleman 1982 bhattacharya 1987 and anthony 1988 find evidence that options

can the reserves approach to monetary control really work on october 6 1979 the board of governors bog of the federal reserve system announced that the federal open market committee fomc was abandoning its historical preoccupation with an interest rate approach to monetary control in favor of a reserve aggregate approach 1 underlying this new approach is the fact that at time t any money stock concept m is the product of a money multiplier m and a reserve aggregate r that is

firm specific information and the correlation between individual stocks and bonds abstract this paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm and finds that they are negatively and contemporaneously correlated this suggests that individual stocks and bonds are driven by firm specific information that is predominantly related to the mean rather than the variance of the firm s underlying assets furthermore i find that lagged stock returns have explanatory power for current bond yield changes while current stock returns are unrelated to lagged bond yield changes this shows that stocks lead bonds in reflecting firm specific information

is there price discovery in equity options abstract we use tick by tick quote data for 39 liquid us stocks and options on them and we focus on events when the two markets disagree about the stock price in the sense that the option implied stock price obtained from the put call parity relation is inconsistent with the actual stock price option market quotes adjust to eliminate the disagreement while the stock market quotes behave normally as if there were no disagreement the disagreement events are typically precipitated by stock price movements and display signed option volume in the direction that tends to eliminate the disagreements these results show that option price quotes do not contain economically significant information about future stock prices beyond what is already reflected in current stock prices i e no economically significant price discovery occurs in the option market we also find no option market price discovery using a much larger sample of disagreement events based on a weaker definition of a disagreement which verifies that the findings for the primary sample are not due to unusual or unrepresentative market behavior during the put call parity violations

stock and option markets the swiss evidence abstract the interactions between the markets for options and underlying shares are examined for switzerland three topics are investigated first the introduction of traded options in the spring of 1988 lead to a permanent and significant increase in the prices of the underlying shares and a reduction in the volatility of returns second price changes on the stock and options markets are positively related during trading on the exchanges the evidence suggests that the stock leads the options market by about ten minutes some feedback is also present third the stochastic characteristics of stock returns are not affected by the expiration of options

the informational role of stock and option volume this article analyzes the intraday interdependence of order flows and price movements for actively traded nyse stocks and their chicago board options exchange cboe traded options stock net trade volume buyer initiated volume minus seller initiated volume has strong predictive ability for stock and option quote revisions but option net trade volume has no incremental predictive ability this suggests that informed investors initiate trades in the stock market but not in the option market on the other hand both stock and option quote revisions have predictive ability for each other thus while information in the stock market is contained in both quote revisions and trades information in the option market is contained only in quote revisions copyright 2002 oxford university press

the valuation of american call options and the expected ex dividend stock price decline abstract this study focuses on the ex dividend stock price decline implicit within the valuation of american call options on dividend paying stocks the roll 1977 american call option pricing formula and the observed structure of cboe call option transaction prices are used to infer the expected ex dividend stock price decline as a proportion of the amount of the dividend the relative decline is shown to be not meaningfully different from one confirming some recent evidence from studies which examined stock prices in the days surrounding ex dividend

stock and option market divergence in the presence of noisy information we examine market behavior of the stock and option markets upon the arrival of noisy information in the form of cnbc s mad money recommendations if stock and option markets are not equally efficient they should respond differently to noisy information with the less efficient market more susceptible to noise we find that the stock market is less efficient than the option market the abnormal difference between option implied and actual stock returns is negative and significant upon exposure to noisy information this difference may yield an economically significant monthly trading profit of up to 5 we conclude that the stock market is more susceptible to noisy information than the option market and is therefore less efficient published by elsevier b v

the economic value of stock and call options on the swedish financial market abstract the intense trading activity and the very existence of organized stock option markets suggest that these financial contracts provide noticeable economic benefits as compared to trades on the stock market in this paper we test the efficiency of recursive optimization strategies on a combined portfolio of stocks and call options series listed on the swedish stock market for comparison the same recursive optimization is performed on a portfolio purely consisting of stocks the portfolio efficiency of the recursive optimization strategy is also compared to results obtained with call options using a black scholes strategy

the fear and exuberance from implied volatility of s p 100 index options i study the relation between option traders risk perception and contemporaneous market conditions risk perception tends to increase when downside volatility increases more than upside volatility the risk return relation is asymmetric and nonlinear best described as a downward sloping reclined s curve that prior gains appear to have some mitigating effect on the fear of loss relative to prior losses points to a house money effect broader market conditions influence the perception of risk in a manner consistent with the keeping up with the joneses effect leverage is a weak explanation for the risk return relation

relative informational efficiency of cash futures and options markets the case of an emerging market we study the lead lag relationships among the spot futures and options markets on hong kong s hang seng index hsi the young options market experiences thin trading and the option returns lag the cash index returns the more mature futures market experiences active trading yet its lead over the cash index appears to be less than the counterparts in other countries a possible reason is the dominance of a few major stocks in the index and these stocks have symmetric lead lag relations with the futures furthermore the informativeness of the non lasting futures and options quotations seems to depend on the market maturity 2001 elsevier science b v all rights reserved

impacts of derivative markets on spot market volatility and their persistence in this article we investigate the impacts of futures and options markets on the volatility of the underlying market unlike earlier studies the focus is on their persistence over time tests on the hang seng index yield several interesting results that often contrast with previous findings empirical results suggest that the quality of new information generated by derivative trading determines the impacts on the spot market volatility the futures market provides new material information reducing spot market volatility the options market on the other hand generates noisy information and distorts price which is followed by an increase in volatility and a decrease in its sensitivity to price change while the impact of futures persists that of options mostly disappears as the market matures our conjecture is that the futures market is mainly driven by informed experienced participants while the options market attracts new inexperienced investors

short run monetary control evidence under a non borrowed reserve operating procedure abstract this paper examines two issues the prediction and short run control of the money stock associated with the experience following the federal reserve s adoption of a non borrowed reserve oriented operating procedure in october 1979 regarding predictability our analysis suggests that econometric models offer no improvement over the board s judgmental forecasting procedure in terms of a lower multiplier forecast error regarding the question of whether alternative operating targets would have lowered monthly variability in the money stock our findings suggest that neither a total reserve nor a monetary base operating target would have enhanced the precision of short run monetary control relative to a non borrowed reserve operating target

price adjustment delays and arbitrage costs evidence from the behavior of convertible preferred prices price adjustment delays occur between in the money convertible preferred stock prices and common stock prices convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks the price predictability stems from price changes in the underlying common stocks leading the price changes in the convertible preferred stocks by up to nine hours cross sectionally about 70 percent of the variation in the unsigned size of the price deviations is explained by proxies for costs of arbitrage

banks as monitors of other banks evidence from the overnight federal funds market this study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers in addition the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing thereby providing insight into the nature of competition in the federal funds market transaction volume and size of transaction effects are uncovered as is evidence of relationship banking between banks these results are made possible by unique data identifying individual federal funds transactions copyright 2001 by university of chicago press

the impact of information timeliness on the predictability of stock and futures returns an application of vector models the objective of this study is to measure the influence of the freshness of information on the ability of an investor to forecast a stock index and the stock index future the study uses data on the finnish fox index depicting price movements of the helsinki stock exchange and the fox futures index we generate a set of representative varmax models and retain the one that minimizes a weighted sum of akaike s aic criterion and the sr criterion of schwartz rissanen

on the valuation of american call options on stocks with known dividends both the roll and the geske equations for the valuation of the american call option on a stock with known dividends are incorrectly specified this note presents the corrected valuation formula explains the misspecifications and provides a numerical example

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

price changes of related securities the case of call options and stocks this paper tests the hypothesis that option prices contain information not reflected in con temporaneous stock prices an options transactions data base is used for the purpose the evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid ask spread for intra day holding periods implications of the profits in the overnight holding periods are discussed

temporal patterns in foreign exchange returns and options although the foreign exchange market is believed to be one of the most efficient financial markets in the world there is significant evidence that technical analysis is profitable in this market in this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns we find that information from the options market improves the performance of technical trading strategies strategies using information from at the money options were more consistently profitable than the most commonly used strategies based on only historical spot exchange rates past prices our results hold out of sample as well as in the late nineties a period when few sources of information have proven reliable consequently options appear to contain valuable information regarding future spot exchange rate movements

a note on a simple accurate formula to compute implied standard deviations abstract we derive a simple accurate formula to compute implied standard deviations for options priced in the classic framework developed by black and scholes 1973 and merton 1973 when a stock price is equal to a discounted strike price this formula reduces to a formula provided by brenner and subrahmanyam 1988 however their formula s accuracy is sensitive to stock price deviations from a discounted strike price the formula derived here extends the range of accuracy to a wide band of option moneyness

replication in empirical economics the journal of money credit and banking project this paper examines the role of replication in empirical economic research it presents the findings of a two year study that collected programs and data from authors and attempted to replicate their published results the research provides new and important information about the extent and causes of failures to replicate published results in economics the findings suggest that inadvertent errors in published empirical articles are a commonplace rather than a rare occurence copyright 1986 by american economic association

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested