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The Relation Between Option Mispricing And Volume In The Black‐Scholes Option Model

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  • D. Michael Long
  • Dennis T. Officer

Abstract

We investigate the relation between mispricing in the Black‐Scholes option pricing (BSOP) model and volume in the option market. Our results indicate heavily traded call options are priced more efficiently and have lower mispricing errors than thinly traded options. However, this relation shifts significantly on days when call option trading is high. On high‐volume days, the BSOP model mispricing errors are significantly larger than mispricing errors on normal‐volume days. We believe large increases in volume may reflect new and changing market information, thus making pricing less efficient in the BSOP model.

Suggested Citation

  • D. Michael Long & Dennis T. Officer, 1997. "The Relation Between Option Mispricing And Volume In The Black‐Scholes Option Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(1), pages 1-12, March.
    • Handle: RePEc:bla:jfnres:v:20:y:1997:i:1:p:1-12
    DOI: 10.1111/j.1475-6803.1997.tb00233.x
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    Cited by:

    1. Wen-chung Guo & Ying-huei Chen, 2014. "Pricing of put warrants and competition among issuers," Economics Bulletin, AccessEcon, vol. 34(4), pages 2315-2323.
    2. Saikat Nandi, 2000. "Asymmetric information about volatility: How does it affect implied volatility, option prices and market liquidity?," Review of Derivatives Research, Springer, vol. 3(3), pages 215-236, October.
    3. Panayiotis Andreou & Chris Charalambous & Spiros Martzoukos, 2006. "Robust Artificial Neural Networks for Pricing of European Options," Computational Economics, Springer;Society for Computational Economics, vol. 27(2), pages 329-351, May.
    4. Robert E.J. Hibbard & Rob Brown & Keith R. McLaren, 2002. "Nonsimultaneity and Futures Option Pricing: Simulation and Empirical Evidence," Monash Econometrics and Business Statistics Working Papers 13/02, Monash University, Department of Econometrics and Business Statistics.
    5. Nikkinen, Jussi, 2003. "Normality tests of option-implied risk-neutral densities: evidence from the small Finnish market," International Review of Financial Analysis, Elsevier, vol. 12(2), pages 99-116.

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