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Keywords:

  • option market;
  • price discovery;
  • information share
  • G10

Abstract

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.