Why Option Prices Lag Stock Prices: A Trading-Based Explanation

Kalok Chan, Y Peter Chung and Herb Johnson

Journal of Finance, 1993, vol. 48, issue 5, 1957-67

Abstract: While many studies find that option prices lead stock prices, J. A. Stephan and R. E. Whaley (1990) find that stocks lead options. The authors find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, they show their results can be explained as spurious leads induced by infrequent trading of options. The authors show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, they find no evidence of arbitrage opportunities associated with the stock lead. Copyright 1993 by American Finance Association.

Date: 1993
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