Do Call Prices and the Underlying Stock Always Move in the Same Direction?

Charles Cao, Gurdip S. Bakshi () and Zhiwu Chen
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Gurdip S. Bakshi: University of Maryland, Robert H. Smith School of Business

Yale School of Management Working Papers from Yale School of Management

Abstract: This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that when sampled intraday (or inter-day), (i) call (put) prices often go down (up) even as the underlying price goes up, and (ii) call and put prices often increase, or decrease, together. Our results are valid after controlling for time-decay and market microstructure effects. Therefore, one-dimensional diffusion option models cannot be completely consistent with observed option-price dynamics; options are not redundant securities, nor ideal hedging instruments---puts and the underlying asset prices may go down together.

JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 1999-10-14
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Citations: View citations in EconPapers (1)

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Journal Article: Do Call Prices and the Underlying Stock Always Move in the Same Direction? (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm125

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