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Long memory and the relation between options and stock prices

Author

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  • Huang, Teng-Ching
  • Tu, Yu-Chen
  • Chou, Heng-Chih

Abstract

This study investigates the long-memory property and the fractionally cointegration between absolute changes in observed stock prices and implied stock prices from option pricing model. We find a stylized fact that absolute price movements in stock and option markets are characterized by long memory and they present a fractionally cointegrated relation. The option prices appear to be valuable for the stock prices based on an appropriate econometric methodology, which captures the persistence of both price series. Our empirical results also support the presence of information effect in call option, but the volume effect is absent for all cases.

Suggested Citation

  • Huang, Teng-Ching & Tu, Yu-Chen & Chou, Heng-Chih, 2015. "Long memory and the relation between options and stock prices," Finance Research Letters, Elsevier, vol. 12(C), pages 77-91.
    • Handle: RePEc:eee:finlet:v:12:y:2015:i:c:p:77-91
    DOI: 10.1016/j.frl.2014.11.005
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Wei-Guo & Li, Zhe & Liu, Yong-Jun, 2018. "Analytical pricing of geometric Asian power options on an underlying driven by a mixed fractional Brownian motion," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 402-418.
    2. Szczygielski, Jan Jakub & Charteris, Ailie & Obojska, Lidia, 2023. "Do commodity markets catch a cold from stock markets? Modelling uncertainty spillovers using Google search trends and wavelet coherence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    3. Muhammad Aftab & Abid Ali & Scott W. Hegerty, 2021. "Foreign exchange market pressure and stock market dynamics in emerging Asia," International Economics and Economic Policy, Springer, vol. 18(4), pages 699-719, October.
    4. Sant'Anna, Leonardo Riegel & de Oliveira, Alan Delgado & Filomena, Tiago Pascoal & Caldeira, João Frois, 2020. "Solving the index tracking problem based on a convex reformulation for cointegration," Finance Research Letters, Elsevier, vol. 37(C).
    5. Sheng, Hainan, 2022. "Option measures and stock characteristics," Finance Research Letters, Elsevier, vol. 44(C).

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    More about this item

    Keywords

    Long memory; Fractional cointegration; Information effect; Volume effect; NBLS formula;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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