Option Prices as Predictors of Equilibrium Stock Prices

Authors

  • STEVEN MANASTER,

  • RICHARD J. RENDLEMAN JR.

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    • Assistant Professor at the University of Chicago Graduate School of Business; and Associate Professor of Finance at the Fuqua School of Business of Duke University respectively. The authors wish to thank participants in the finance workshops at the following schools for providing helpful comments: The University of Chicago, DePaul University, The University of Florida, Harvard University, Louisiana State University, The University of North Carolina, The University of Texas, and Wake Forest University. In addition, we owe a special thanks to Jonathan Ingersoll, the Editor, Michael Brennan, and James D. MacBeth.

ABSTRACT

The Black-Scholes option pricing model, modified for dividend payments, is used to calculate jointly implied stock prices and implied standard deviations. A comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices. The implications of this finding are discussed.

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