Do Call Prices and the Underlying Stock Always Move in the Same Direction?
AbstractThis article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that when sampled intraday (or inter-day), (i) call (put) prices often go down (up) even as the underlying price goes up, and (ii) call and put prices often increase, or decrease, together. Our results are valid after controlling for time-decay and market microstructure effects. Therefore, one-dimensional diffusion option models cannot be completely consistent with observed option-price dynamics; options are not redundant securities, nor ideal hedging instruments---puts and the underlying asset prices may go down together.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm125.
Date of creation: 14 Oct 1999
Date of revision:
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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