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

potential biases from using only trade prices of related securities on different exchanges a comment equilibrium prices of the underlying stocks using daily trade prices this paper points out that a bias associated with the bid ask spread and nonsynchronous trading may create the impression that option prices contain information not reflected in the contemporaneous stock prices even during times when the two prices are in equilibrium the mr methodology is described in section i and the potential biases arising due to the bid ask bounce and the non synchroneity of stock and option prices are illustrated in section ii following an observation in their paper that the stock prices implied by the option prices are smaller than the corresponding stock prices only thirty seven percent of the time section iii looks at the distribution of trade prices relative to the last quoted bid ask prices for both stocks and options many more during the day option trades occur at the ask than at the bid whereas the distribution is approximately symmetric for stocks a likely implication is that the option trade prices and therefore the implied stock prices are upward biased estimates of the corresponding true prices this bias increases at day end for both stocks and options

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

transmission network cost allocation based on equivalent bilateral exchanges this paper presents a novel methodology for allocating the cost of a transmission network to its users based on the principle of equivalent bilateral exchanges which states that after all physical laws governing the flow of power have been met each demand is assigned a fraction of each generation and each generator is assigned a fraction of each demand in a uniform manner transmission cost allocation based on this principle presents several advantages namely independence from the choice of the slack bus recognition of counter flows and transmission use charges that are stable and always positive

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

allocation of transmission fixed charges an overview the application of marginal cost in pricing the transmission services has shown not effective mainly due to revenue reconciliation problems to overcome this a set of other methods derived from the mw mile rule has been suggested to allocate transmission fixed costs this paper compares such methods known as embedded cost methods in a centralized transmission network environment although these methods actually share the total cost and are very simple they are usually rejected due to the lack of a good economic reasoning the economic issue and the impact on the system expansion planning of such allocation are addressed in this paper some examples with the brazilian transmission system illustrate the results derived from this analysis

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

improving inter transmission compensation in eu abstract this article is intended as a roadmap to the correction of the existing shortcomings in the eu power transmission tariff system especially in the existing mechanism of inter transmission system operator tso compensation itc the relevant literature is surveyed and the essence of the issue is formulated definitions preconditions assumptions and constraints for the problem are explained the paper outlines the most simple and straightforward approach for the improvement of inter transmission compensation in the continental european synchronous area the proposals are based on the old practice of socialization of the network costs retained in almost all european countries i e the principle of charging the customers at the exit equal treatment is given to internal users and cross border users a tso is reimbursed for both internal and cross border flows from the users conjoined to its network on an equal footing with the users extracting power from the peripheral nodes the existing inequity in individual payments for power transmission is overcome and the cross border subsidy element is avoided this approach should be tested modeled and evaluated with real data for the european union of networks some key parts of the article are written in a more popular style in order to be accessible to inexpert readers as well

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

min max fair power flow tracing for transmission system usage cost allocation a large system perspective power flow tracing has been suggested as an approach for evaluating 1 transmission system usage tsu cost and 2 loss mw cost for generator and load entities in the system recently optimal power flow tracing methods have been proposed to explicitly model fairness constraints in the tracing framework this paper further strengthens the tracing compliant min max fair cost allocation approach the min max model proposed in this paper is robust it addresses concerns like scalability numerical stability and termination in a finite number of steps while searching the optimal solution we also propose a methodology to model discoms and gencos as coalition within min max framework case studies on an all india network of 1699 nodes and comparison with average participation and marginal participation methods bring out the better conflict resolution feature of the proposed approach a method to model hvdc lines within the marginal participation scheme is also proposed quantitative and qualitative comparison of various tsu cost allocation methods on such a large system is another noteworthy contribution of the paper

predicting currency return volatility abstract standard deviations and elasticity of variance coefficients implied in currency option prices are employed to predict subsequent currency return volatility despite documented variance non stationarity strong predictive relationships are found the predictive accuracies of standard deviations and elasticity coefficients are statistically indistinguishable finally predictive accuracy is invariant to the weighting techniques employed

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

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

an aumann shapley approach to allocate transmission service cost among network users in electricity markets this work presents a new methodology for the allocation of transmission service cost among network users in energy markets the proposed method is based on an optimization game theoretic framework aumann shapley that retains the desirable properties of other existing methodologies such as the average participations factors apf and long run marginal costs lrmc the approach is shown to be computationally feasible and presents desirable characteristics in terms of economic coherence and isonomy computational results are presented for the brazilian power system and compared with those obtained by three other methodologies lrmc apf and the current method adopted in brazil

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

nodal price control a mechanism for transmission network cost allocation this paper presents an approach for the allocation of transmission network costs by controlling the nodal electricity prices the proposed approach introduces generation and nodal injection penalties into the traditional economic dispatch so as to create nodal price differences that recover the required transmission revenue from the resulting congestion rent as a consequence the new electricity prices reflect not only the marginal costs of production subject to transmission constraints but also the capital costs of the network this is the approach commonly adopted with most commodities whose price includes the unit cost of the good itself as well as the transportation cost from the production centers to the final consumer

combined pool bilateral dispatch i performance of trading strategies this three paper series deals with the dispatch of power networks under mixed pool bilateral trading the major questions examined are i to what degree does the relative level of pool versus bilateral trading influence performance in terms of individual power levels costs prices revenues and expenditures ii what is the comparative performance of mixed trading with firm and nonfirm bilateral contracts under various curtailment strategies and iii is the revenue derived from the pool and bilateral trading consistent with the corresponding unbundled costs the above issues are sequentially addressed in each of the three parts the eventual goal of these results is to help generator and load serving entities choose appropriate relative levels of pool versus bilateral trades while considering risk economic performance as well as physical constraints this paper proposes a one step optimal power flow model that dispatches the pool in combination with the privately negotiated bilateral contracts while minimizing cost and accounting for both losses and congestion in part i notions of pool bilateral demand and generation as well as a number of technical and economic performance measures for each competing entity are defined this dissection of total and individual financial measures according to pool or bilateral trading allows the market participant to evaluate the profitability of each component of its chosen pool bilateral mix a number of simulation results illustrate the effect of varying the relative levels of pool bilateral trading on the values of individual performance measures

implied spot rates as predictors of currency returns a note currency call option transactions data and the black scholes option pricing model as modified by merton for continuous dividends and as adapted to currency options by biger and hull and by garman and kohlhagen are used to imply spot foreign exchange rates the proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials further an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits manaster and rendleman 18 in a recent study of the informational efficiency of the u s stock market investigate the ability of call option prices to predict through implied stock prices the equilibrium values of their underlying common stocks in an ex post test manaster and rendleman find that closing option prices contain information beyond that reflected in closing stock prices due to data synchronization problems however these authors are unable to distinguish whether these results reflect superior or simply more recent information in an ex ante test manaster and rendleman are unable to reject the null hypothesis of no additional information content in implied stock prices bhattacharya 1 employing synchronized transactions data finds that option prices possess information not contained in contemporaneous stock prices although it is not clear whether the value of this information exceeds associated trading costs jennings and starks 15 provide evidence supporting the stock options market s role in determining equilibrium stock prices specifically jennings and starks examine stock price adjustments to quarterly earnings announcements using samples of firms with and without listed options and find that nonoption firms require substantially more time to adjust similar to stock options the possibility exists that foreign currency options contain information beyond that represented in their underlying market spot exchange rates this study extends the manaster and rendleman methodology to call options on foreign exchange to investigate empirically this possibility specifically this is accomplished by testing whether daily exchange rates that are implied from currency option prices and a version of the black and scholes 3 option pricing model opm contain information that may be employed to signal profitable trading strategies in foreign exchange currency option transactions data are supplied by the philadelphia stock exchange phlx results

a penalty scheme for reducing electricity price volatility the deregulation of electric power systems in many parts of the world has changed the mechanism of electricity pricing unlike the fixed price in conventional power systems electricity price varies with time and location in the new deregulated environment electricity prices in a restructured power system can be highly volatile due to the random nature of system failures and demands it is therefore very difficult for the independent system operator iso to control the price and associated risk the high prices beyond control have resulted in significant impacts on customers as well as on system operation this paper proposes a penalty scheme for reducing electricity price volatility caused by failures in generation companies gencos or transmission companies transcos in this scheme gencos and transcos will be penalized if their equipment failures result in unexpected price changes the price decomposition technique is used to evaluate the price components caused by random failures the penalty can be calculated based on the difference of electricity price components between the normal state and the contingency states moreover a simplified schema which is based on profit analysis is also proposed in this paper the proposed penalty scheme not only gives the gencos and transcos an incentive to improve their reliabilities but also provides a flexible tool for the iso to control the system price risk the possible shortcomings of the proposed schema are also specified in the paper the ieee rts is analyzed to illustrate the technique

slow diffusion of information and price momentum in stocks evidence from options markets this paper investigates the source of price momentum in the stock market using information from options markets we provide direct evidence of the gradual information diffusion model in hong and stein 1999 momentum profits are larger for stocks whose information diffuses slowly into the stock market we exploit the options markets to identify stocks with slow information diffusion speed as informed traders trade options to realize the information that has not been fully incorporated in the stock price we are able to enhance the momentum strategy by selecting winner loser stocks with high growth large drop in call option implied volatility our empirical strategy generates a risk adjusted alpha of 1 8 per month over the 1996 2011 period during which the simple momentum strategy fails to perform the results are robust to the impact of earnings announcement transaction costs industry concentration and choice of options moneyness and time to maturity finally our finding is not driven by existing stock or option related characteristics that are known to improve momentum

cost of wheeling methodologies the cost of wheeling and the methodology by which it is computed is a high priority problem throughout the power industry due to the growth in transmission facilities the cost differentials between utility companies and the dramatic growth in nonutility generation capacity this paper contains descriptions and summaries of computational procedures and data requirements of four embedded cost methodologies two long run incremental cost methods and the short run marginal cost method four methodologies are also presented for allocating the wheeling costs among a number of wheels when simultaneously present on a company s system as required for the standard long run incremental cost method

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

a structural transmission cost allocation scheme based on capacity usage identification in liberalized electricity markets it is essential and of great importance to develop a fair transmission cost allocation scheme that is able to reflect the extent of use of the transmission facilities as much as possible in this paper the transmission capacity is divided into four components capacity used in normal conditions cn capacity reserved for contingencies cc capacity reserved for future use cf and invalid capacity ic cn and cc are determined by the power flow in the normal and contingency conditions of the system operation snapshot respectively the cf is determined by the maximum power flow in contingency conditions over a certain period say yearly the cost corresponding to ic would not be allocated to network users based on capacity usage identification differential cost allocation methods are designed according to the functions of the transmission capacity the cost corresponding to the capacity usage of the transmission asset under normal and contingency conditions is allocated separately case studies in a 3 bus system and the ieee 30 bus system validate the good performance of the proposed structural transmission cost allocation scheme

transactions data tests of efficiency of the chicago board options exchange abstract this paper performs lower boundary condition tests based on rational pricing of call options and an implied standard deviation test based on the bid ask prices of options these efficiency tests attempt to closely approximate conditions in the option markets to avoid the pitfalls indicated by phillips and smith 1980 the tests use transactions data and account for the effects of stock and option bid ask prices simultaneity of stock and option prices depth of market execution lag and transaction costs the small and relatively infrequent profits due to market mispricing disappear in the lower boundary tests when transaction costs are taken into account frequent violations of the tighter boundary conditions in the implied standard deviation test are reported but the estimated profits cannot be unambiguously attributed to option market inefficiency

decision analysis of merchant transmission investment by perpetual options theory this paper introduces the concept of perpetual options theory to analyze merchant transmission investment through an approved rate since the electric usages and the associated revenue is stochastic in nature applying the perpetual options theory allows an investor to determine the most opportunistic time to start a transmission project and obtain the maximum revenue returns or let the option expire when the economic incentive is not sufficient in today s environment this decision approach is more appropriate since it provides transmission investors a better projection of its return on investment and an exit strategy for an investment decision

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 valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

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

standard deviations implied in option prices as predictors of future stock price variability abstract standard deviations implied in option prices have recently been introduced as being better than average predictors of future stock price variability this article specifically studies the predictive ability of implicit standard deviations taking into account the dividend problem and the problem of optimal weighting schemes of the standard deviations when there are several options on the same stock transaction data information was used to study the importance of non simultaneities in observing stock and option prices

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

an analysis of trade size clustering and its relation to stealth trading abstract nyse and nasdaq trades increasingly cluster on multiples of 500 1 000 and 5 000 shares such clustering varies over time and across stocks and tends to increase with the level of trading activity furthermore rounded trades tend to have more persistence both in occurrence and in trade initiation finally medium sized rounded trades tend to have greater relative price impact than large rounded trades from these observations we surmise that trade size clustering is consistent at least in part with the actions of stealth traders who tend to use medium sized rounded transactions in an attempt to disguise their trades