Price discovery in the price disagreement between equity and option markets: Evidence from SSE ETF50 options of China

Dehong Liu, Qi Qiu, J. Christopher Hughen and Peter Lung

International Review of Economics & Finance, 2019, vol. 64, issue C, 557-571

Abstract: We study the price discovery in price disagreement between the China ETF 50 index and option markets. The price disagreement is measured by upper and lower option boundary violations that are usually considered evidence of market inefficiency. We find that option boundary violations contain information about future returns and contribute to the price discovery process. Lower option boundary violations are more informative than upper boundary violations. Short-term at-the-money options contribute more to the price discover process than others. Pooling all the options together may introduce noise in the test of price discovery in the option market. These test results complement the mixed findings in literature regarding the price discovery in option markets.

Keywords: Price disagreement; Option market inefficiency; Price discovery process; Informed trading; Reversion to efficiency; Conditional information flow (search for similar items in EconPapers)
JEL-codes: C1 C3 C4 G1 G4 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:64:y:2019:i:c:p:557-571

DOI: 10.1016/j.iref.2019.04.005

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