Co-movements of index options and futures quotes

Ruediger Fahlenbrach and Patrik Sandås

Journal of Empirical Finance, 2009, vol. 16, issue 1, 151-163

Abstract: We report evidence that the co-movements of index options and index futures quotes differ sharply from perfect correlation in periods with option trades. In half-hour intervals with (without) option trades 25% (12%) of call option quote changes have either the opposite sign or are larger in magnitude than the corresponding index futures quote changes. We calibrate a stochastic volatility model that allows for trade and no-trade periods using real data and simulate the joint co-movements of index quotes and option quotes in this model. We show that for trade intervals the observed co-movements differ from the benchmark case established by our simulations approximately three times too often. We provide empirical evidence that market microstructure effects - specifically, stale quotes and aggressive quotes - explain the majority of the deviations from the benchmark. Our findings are relevant for techniques that use estimates of local co-movements as inputs to price or hedge options.

Keywords: Options; High-frequency; data; Market; Microstructure; Hedge; ratio (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Working Paper: Co-movements of Index Options and Futures Quotes (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:16:y:2009:i:1:p:151-163

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