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Stock and option market divergence in the presence of noisy information

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Author Info

  • Chen, Carl R.
  • Diltz, J. David
  • Huang, Ying
  • Lung, Peter P.
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    Abstract

    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611000410
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 8 (August)
    Pages: 2001-2020

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:8:p:2001-2020

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Information and market efficiency Price pressure Options Informed trading;

    References

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    Cited by:
    1. Hayunga, Darren K. & Holowczak, Richard D. & Lung, Peter P. & Nishikawa, Takeshi, 2012. "Derivatives traders’ reaction to mispricing in the underlying equity," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2438-2454.

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