This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Stock Market Quality in the Prescence of a Traded Option

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
de Jong, Cyriel
Koedijk, Kees
Schnitzlein, Charles
Abstract

We use a controlled economic experiment to examine the implications of asymmetric information for informational linkages between a stock market and a traded call option on that stock. The setting is based on the Kyle model and Back (1993). We find that an insider trades aggressively in both the stock and the option, and that this leads to important feedback effects between the two markets: price discovery in the stock market also occurs in the option market and vice versa. 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 argue that this provides new insights into how the introduction of a traded option improves the market quality of the underlying asset.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cepr.org/pubs/dps/DP3173.asp
File Format: application/pdf
File Function:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3173.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:cpr:ceprdp:3173

Contact details of provider:
Postal: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords: experimental economics financial derivatives information asymmetry market microstructure

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G20 - Financial Economics - - Financial Institutions and Services - - - General

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-81, September. [Downloadable!] (restricted)
  2. Flood, Mark D, et al, 1999. "Quote Disclosure and Price Discovery in Multiple-Dealer Financial Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 37-59.
  3. Ball, Sheryl B. & Bazerman, Max H. & Carroll, John S., 1991. "An evaluation of learning in the bilateral winner's curse," Organizational Behavior and Human Decision Processes, Elsevier, vol. 48(1), pages 1-22, February. [Downloadable!] (restricted)
  4. Kluger, Brian D & Wyatt, Steve B, 1995. " Options and Efficiency: Some Experimental Evidence," Review of Quantitative Finance and Accounting, Springer, vol. 5(2), pages 179-201, June.
  5. Jennings, Robert & Starks, Laura, 1986. " Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-25, March. [Downloadable!] (restricted)
  6. Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(4), pages 743-80. [Downloadable!] (restricted)
  7. Conrad, Jennifer, 1989. " The Price Effect of Option Introduction," Journal of Finance, American Finance Association, vol. 44(2), pages 487-98, June. [Downloadable!] (restricted)
  8. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February. [Downloadable!] (restricted)
    Other versions:
  9. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 5-35.
  10. Friedman, Daniel & Harrison, Glenn W & Salmon, Jon W, 1984. "The Informational Efficiency of Experimental Asset Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 349-408, June. [Downloadable!] (restricted)
  11. Bloomfield, Robert & O'Hara, Maureen, 2000. "Can transparent markets survive?," Journal of Financial Economics, Elsevier, vol. 55(3), pages 425-459, March. [Downloadable!] (restricted)
  12. Fleming, Jeff & Ostdiek, Barbara, 1999. "The impact of energy derivatives on the crude oil market," Energy Economics, Elsevier, vol. 21(2), pages 135-167, April. [Downloadable!] (restricted)
  13. Stewart Mayhew & Vassil Mihov, 2000. "Another Look at Option Listing Effects," Finance 0004002, EconWPA. [Downloadable!]
  14. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September. [Downloadable!] (restricted)
    Other versions:
  15. Skinner, Douglas J., 1989. "Options markets and stock return volatility," Journal of Financial Economics, Elsevier, vol. 23(1), pages 61-78, June. [Downloadable!] (restricted)
  16. Bloomfield, Robert & O'Hara, Maureen, 1998. "Does order preferencing matter?1," Journal of Financial Economics, Elsevier, vol. 50(1), pages 3-37, October. [Downloadable!] (restricted)
  17. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-67, May. [Downloadable!] (restricted)
  18. Raman Kumar & Atulya Sarin & Kuldeep Shastri, 1998. "The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(2), pages 717-732, 04. [Downloadable!] (restricted)
  19. Sheikh, Aamir M & Ronn, Ehud I, 1994. " A Characterization of the Daily and Intraday Behavior of Returns on Options," Journal of Finance, American Finance Association, vol. 49(2), pages 557-79, June. [Downloadable!] (restricted)
  20. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  21. Detemple, J.B. & Jorion, P., 1989. "Option Listing And Stock Returns," Papers fb-_89-13, Columbia - Graduate School of Business.
  22. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, 04. [Downloadable!] (restricted)
  23. Vijh, Anand M, 1990. " Liquidity of the CBOE Equity Options," Journal of Finance, American Finance Association, vol. 45(4), pages 1157-79, September. [Downloadable!] (restricted)
  24. Lamoureux, Christopher G & Schnitzlein, Charles R, 1997. " When It's Not the Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market," Journal of Finance, American Finance Association, vol. 52(2), pages 683-712, June. [Downloadable!] (restricted)
  25. Back, Kerry, 1993. "Asymmetric Information and Options," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(3), pages 435-72. [Downloadable!] (restricted)
  26. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June. [Downloadable!] (restricted)
  27. Cason, Timothy N, 2000. "The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 385-416.
  28. Bulow, Jeremy & Klemperer, Paul, 1994. "Rational Frenzies and Crashes," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 1-23, February. [Downloadable!] (restricted)
    Other versions:
Full references

Statistics
Access and download statistics

Did you know? IDEAS also covers the most complete directory of Economics departments and institutes, EDIRC.

This page was last updated on 2008-9-15.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.