The Relationship between Stock and Option Prices Changes

J David Diltz and Suhkyong Kim

The Financial Review, 1996, vol. 31, issue 3, 499-519

Abstract: This paper documents an important step in reconciling conflicting results by Manaster and Rendleman and Stephan and Whaley regarding price change relationships between options and their underlying stocks. Using recent advances in bi-directional causality testing and data sources available only fairly recently, statistical tests are conducted that mitigate the nonsynchroneity and bid-ask bias problems that may have affected the Manaster and Rendleman study. Even with these adjustments, empirical results are consistent with Manaster and Rendleman, indicating that stock price changes adjust to lagged option price changes over two trading days. Moreover, results suggest that the causality is bidirectional. Copyright 1996 by MIT Press.

Date: 1996
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