I thank Bonnie Van Ness (the editor), two anonymous referees, Tom George, Jung Hwang, Risa Kumazawa, Guowei Zhang, Hao Zhang, and participants at the 2011 Financial Management Association meetings for helpful comments and suggestions. Any errors are my own.
Price Discovery in Near- and Away-from-the-Money Option Markets
Article first published online: 19 MAR 2013
© 2013, The Eastern Finance Association
Volume 48, Issue 1, pages 25–48, February 2013
How to Cite
Rourke, T. (2013), Price Discovery in Near- and Away-from-the-Money Option Markets. Financial Review, 48: 25–48. doi: 10.1111/j.1540-6288.2012.00352.x
- Issue published online: 21 JAN 2013
- Article first published online: 19 MAR 2013
- option market;
- price discovery;
- information share
This paper examines the relative price discovery roles of near- and away-from-the-money option markets. The evidence shows that, when considering multiple options with different strike prices jointly, option markets have an average information share of 17.6%. However, no individual option market dominates in the price discovery process, higher and lower trading activity options (i.e., near- and away-from-the-money options, respectively) each contribute approximately equally to this process. The main implications of these results are that (1) collectively, option markets process a substantial amount of new stock price-related information, and (2) looking across strike prices, option markets appear to be informationally nonredundant.