The Price Behavior of Option around Large Block Trading in the Underlying Security and Price Discovery of Option
Date Issued
2006
Date
2006
Author(s)
Chen, Kuan-Chen
DOI
zh-TW
Abstract
The suggestion in the literature that options provide a superior investment vehicle implies that informed investors may prefer to trade in options, thereby causing the option market to lead the stock market.
This paper investigates the behavior of option and stock returns around large block transactions in the underlying security in order to observe whether the option market does lead the stock market or not. The empirical results indicate that not only uptick block trading but also downtick block trading there is no evidence of any option price reaction before the block trade.
Besides, this paper also investigates the causality of returns on option and returns on stock；that is, dose option returns cause stock returns or just oppositely stock returns cause option returns. The statistical measure is using by vector autoregresstion model whose lag is ten. The results shows that only stock returns cause option returns. So stock option in Taiwan does not have the ability of price discovery.
Finally, this paper investigates if transaction volumes of option can be an indicator of the trend in future stock prices. The answer is also “no”. Transaction volumes of option do not rise statistically before the block trades. That implies that we cannot predict future stock prices thanks to transaction volumes of option.
Subjects
選擇權
股票大額交易
選擇權價格發現功能
option
block trade
price discovery
Type
thesis
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