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Information flow between derivatives and spot market; the reason of studies results divergence

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  • Abderrahmen Aloulou
  • Younes Boujelbene

Abstract

This paper explains the lack of general consensus in previous studies on the direction of information flow between stocks and derivatives markets. We assume that informed traders do not develop absolute preference for one market; rather they react to private information as case by case. We provide theoretical and empirical proofs to validate this hypothesis. While deciding where trading, informed traders are attracted by higher liquidity and less transactions costs in spot market, and leverage effect offered by options market. We find that the use of leverage effect, which can largely compensate transactions costs and liquidity lack, depends on exceeding critical value of confidence in anticipation expressed as function of option value elasticity with respect to the underlying asset's price. We conclude that information flow between the stock and option markets depends on informed traders' confidence in anticipation based on private information quality and informed traders psychologies and abilities.

Suggested Citation

  • Abderrahmen Aloulou & Younes Boujelbene, 2015. "Information flow between derivatives and spot market; the reason of studies results divergence," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 8(1), pages 20-33.
    • Handle: RePEc:ids:ijmefi:v:8:y:2015:i:1:p:20-33
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    Cited by:

    1. Abderrahmen Aloulou & Younes Boujelbene, 2019. "Dynamic analysis of implied risk neutral density," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 12(1), pages 39-58.
    2. Abderrahmen Aloulou & Siwar Ellouze, 2017. "Does fundamental value run asset price formation process? Evidence from option price information content," Journal of Asset Management, Palgrave Macmillan, vol. 18(4), pages 255-268, July.

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