Stock Market Quality in the Presence of a Traded Option
Cyriel de Jong,
Kees G. Koedijk and
Charles R. Schnitzlein Additional contact information Cyriel de Jong: RSM Erasmus University
Kees G. Koedijk: RSM Erasmus University and CEPR
Charles R. Schnitzlein: College of Business Administration, University of Central Florida
We use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option. We find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock and volatility is lower. We provide evidence that the introduction of an option improves market quality in the underlying asset.