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Stock Market Quality in the Presence of a Traded Option

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Author Info

  • Cyriel de Jong

    (RSM Erasmus University)

  • Kees G. Koedijk

    (RSM Erasmus University and CEPR)

  • Charles R. Schnitzlein

    (College of Business Administration, University of Central Florida)

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    Abstract

    We use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option. We find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock and volatility is lower. We provide evidence that the introduction of an option improves market quality in the underlying asset.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 4 (July)
    Pages: 2243-2274

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:4:p:2243-2242

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Noussair, C.N. & Tucker, S., 2013. "Experimental Research On Asset Pricing," Discussion Paper 2013-020, Tilburg University, Center for Economic Research.
    2. Alejandro Bernales & Massimo Guidolin, 2013. "The Effects of Information Asymmetries on the Success of Stock Option Listings," Working Papers 484, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Niels C. Thygesen & Robert N. McCauley & Guonan Ma & William R. White & Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae & Ernest Gnan & Morten Balling & Paul , 2013. "50 Years of Money and Finance: Lessons and Challenges," SUERF 50th Anniversary Volume - 50 Years of Money and Finance: Lessons and Challenges, SUERF - The European Money and Finance Forum, number 1 edited by Morten Balling & Ernest Gnan.
    4. Palan, Stefan, 2010. "Digital options and efficiency in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 506-522, September.

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