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Price discovery in the price disagreement between equity and option markets: Evidence from SSE ETF50 options of China

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  • Liu, Dehong
  • Qiu, Qi
  • Hughen, J. Christopher
  • Lung, Peter

Abstract

We study the price discovery in price disagreement between the China ETF 50 index and option markets. The price disagreement is measured by upper and lower option boundary violations that are usually considered evidence of market inefficiency. We find that option boundary violations contain information about future returns and contribute to the price discovery process. Lower option boundary violations are more informative than upper boundary violations. Short-term at-the-money options contribute more to the price discover process than others. Pooling all the options together may introduce noise in the test of price discovery in the option market. These test results complement the mixed findings in literature regarding the price discovery in option markets.

Suggested Citation

  • Liu, Dehong & Qiu, Qi & Hughen, J. Christopher & Lung, Peter, 2019. "Price discovery in the price disagreement between equity and option markets: Evidence from SSE ETF50 options of China," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 557-571.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:557-571
    DOI: 10.1016/j.iref.2019.04.005
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    Cited by:

    1. Wu, Lingke & Liu, Dehong & Yuan, Jianglei & Huang, Zhenhuan, 2022. "Implied volatility information of Chinese SSE 50 ETF options," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 609-624.
    2. Da Dong & Qingfu Liu & Pingping Tao & Zhiliang Ying, 2021. "The pricing mechanism between ETF option and spot markets in China," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1286-1300, August.
    3. Lin, Tiantian & Liu, Dehong & Zhang, Lili & Lung, Peter, 2019. "The information content of realized volatility of sector indices in China’s stock market," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 625-640.

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    More about this item

    Keywords

    Price disagreement; Option market inefficiency; Price discovery process; Informed trading; Reversion to efficiency; Conditional information flow;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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