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Price discovery in stock and options markets

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  • Patel, Vinay
  • Putniņš, Tālis J.
  • Michayluk, David
  • Foley, Sean

Abstract

Using new empirical measures of information leadership, we find that the role of options in price discovery is up to five times larger than previously thought. Approximately one-quarter of new information is reflected in options prices before being transmitted to stock prices, with options playing a more important role in price discovery around information events. Using unique data on traders prosecuted for insider trading, we find that they often choose to trade in options, attracted by their leverage, and when they do the options share of price discovery is higher. Our results help interpret conflicting findings in the existing literature.

Suggested Citation

  • Patel, Vinay & Putniņš, Tālis J. & Michayluk, David & Foley, Sean, 2020. "Price discovery in stock and options markets," Journal of Financial Markets, Elsevier, vol. 47(C).
    • Handle: RePEc:eee:finmar:v:47:y:2020:i:c:s1386418119303544
    DOI: 10.1016/j.finmar.2019.100524
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    More about this item

    Keywords

    Price discovery; Stock; Option; Information share; Insider trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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