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Why Option Prices Lag Stock Prices: A Trading-Based Explanation

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  • Chan, Kalok
  • Chung, Y Peter
  • Johnson, Herb

Abstract

While many studies find that option prices lead stock prices, J. A. Stephan and R. E. Whaley (1990) find that stocks lead options. The authors find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, they show their results can be explained as spurious leads induced by infrequent trading of options. The authors show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, they find no evidence of arbitrage opportunities associated with the stock lead. Copyright 1993 by American Finance Association.

Suggested Citation

  • Chan, Kalok & Chung, Y Peter & Johnson, Herb, 1993. "Why Option Prices Lag Stock Prices: A Trading-Based Explanation," Journal of Finance, American Finance Association, vol. 48(5), pages 1957-1967, December.
    • Handle: RePEc:bla:jfinan:v:48:y:1993:i:5:p:1957-67
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