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Asymmetric Information and Options

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Author Info
Back, Kerry
Abstract

In an extension of the Kyle (1985) model of continuous insider trading, it is shown that asymmetric information can make it impossible to price options by arbitrage. Even when an option would appear to be redundant, its introduction into the market can cause the volatility of the underlying asset to become stochastic. This eliminates the potential for dynamically replicating the option. The change in the price process of the asset reflects a change in the information transmitted by volume and prices when the option is traded. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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File URL: http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 6 (1993)
Issue (Month): 3 ()
Pages: 435-72
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:6:y:1993:i:3:p:435-72

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  1. Jun Pan & Allen Poteshman, 2004. "The Information of Option Volume for Future Stock Prices," NBER Working Papers 10925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Peter A. Abken & Saikat Nandi, 1996. "Options and volatility," Economic Review, Federal Reserve Bank of Atlanta, issue Dec, pages 21-35. [Downloadable!]
  3. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2009. "Options introduction and volatility in the EU ETS," EconomiX Working Papers 2009-33, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  4. de Jong, Cyriel & Koedijk, Kees & Schnitzlein, Charles, 2002. "Stock Market Quality in the Prescence of a Traded Option," CEPR Discussion Papers 3173, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Robert Engle, 1999. "Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market," University of California at San Diego, Economics Working Paper Series 1999-05, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  6. Dan Bernhardt & Ryan Davies & John Spicer, 2000. "Long-term information, short-lived derivative securities," Working Papers 994, Queen's University, Department of Economics. [Downloadable!]
  7. Jong, C.M. de, 2001. "Informed Option Trading Strategies," Research Paper ERS-2001-55-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  8. Saikat Nandi, 1995. "Asymmetric information about volatility and option markets," Working Paper 95-19, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. repec:mop:credwp:09.07.85 is not listed on IDEAS
    Other versions:
  10. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2009. "Options Introduction and Volatility in the EU ETS," Working Papers halshs-00405709_v1, HAL. [Downloadable!]
  11. K. John & A. Koticha & R. Narayanan, . "Margin Rules, Informed Trading in Derivatives and Price Dynamics," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-047, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  12. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2009. "Options introduction and volatility in the EU ETS," Working Papers hal-00419339_v1, HAL. [Downloadable!]
  13. Marcus Clements & Harminder Singh & Antonie Van Eekelen, 2007. "Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets," Accounting, Finance, Financial Planning and Insurance Series 2007_20, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
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