University of Illinois Urbana-Champaign

Temporal Price Relation between Stock and Option Markets and A Bias of Implied Volatility in Option Price

Boyle, Phelim P.; Byoun, Seokgu; Park, Hun Y.

Content Files
ofor99-07.pdf

Permalink

https://hdl.handle.net/2142/4022

Description

Title
Temporal Price Relation between Stock and Option Markets and A Bias of Implied Volatility in Option Price
Author(s)
  • Boyle, Phelim P.
  • Byoun, Seokgu
  • Park, Hun Y.
Issue Date
1999-09
Keyword(s)
  • lead-lag relationship
  • spot market
  • option market
Date of Ingest
2008-03-17T19:50:20Z
Abstract
We show that if a particular temporal relation exists between the option and spot markets, the implied volatility in option prices can be biased depending on the level of the true volatility. The higher the true volatility, the more upward (downward) biased the implied volatility will be, if the option market leads (lags) the spot market. Using intraday data of the S&P 500 index options, we show that the option market leads the spot market at least in the sample. More importantly, the implied volatility is biased due to the lead-lag relationship, and the bias is more profound when the market is more volatile.
Publisher
Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report Name or Number
OFOR Working Paper Series, no. 99-07
Type of Resource
text
Genre of Resource
Working / Discussion Paper
Language
en
Permalink
http://hdl.handle.net/2142/4022

Owning Collections

OFOR Working Paper Series PRIMARY