Long memory and the relation between options and stock prices

Teng-Ching Huang, Yu-Chen Tu and Heng-Chih Chou

Finance Research Letters, 2015, vol. 12, issue C, 77-91

Abstract: This study investigates the long-memory property and the fractionally cointegration between absolute changes in observed stock prices and implied stock prices from option pricing model. We find a stylized fact that absolute price movements in stock and option markets are characterized by long memory and they present a fractionally cointegrated relation. The option prices appear to be valuable for the stock prices based on an appropriate econometric methodology, which captures the persistence of both price series. Our empirical results also support the presence of information effect in call option, but the volume effect is absent for all cases.

Keywords: Long memory; Fractional cointegration; Information effect; Volume effect; NBLS formula (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:12:y:2015:i:c:p:77-91

DOI: 10.1016/j.frl.2014.11.005

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