Probability of Price Reversal and Relative Noise in Stock and Option Markets
In this paper we take a new approach to the study of the interrelation between stock and option markets by extending Stoll's (1989) model of cost components of the bid-ask spread to include an error component in prices. Building upon Stoll's estimates of the probability of price reversals, we determine which of the option or stock markets carries more noise. The empirical results indicate that option markets are nosier than stock markets. Such findings are consistent with the view that option markets serve as a testing ground for noisy new information because of their comparative advantage regarding transaction costs, liquidity, and potential leverage.
Year of publication: |
1994
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Authors: | Gendron, Michel ; Khoury, Nabil ; Yourougou, Pierre |
Published in: |
Journal of Financial Research. - Southern Finance Association - SFA, ISSN 0270-2592. - Vol. 17.1994, 2, p. 147-59
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Publisher: |
Southern Finance Association - SFA Southwestern Finance Association - SWFA |
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