Is there price discovery in equity options?

Dimitriy Muravyev, Neil D. Pearson, John Broussard

Research output: Contribution to journalArticleScientificpeer-review

52 Citations (Scopus)

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.
Original languageEnglish
Peer-reviewed scientific journalJournal of Financial Economics
Volume107
Issue number2
Pages (from-to)259-283
Number of pages25
ISSN0304-405X
DOIs
Publication statusPublished - 2013
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management

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