Do call prices and the underlying stock always move in the same direction?

Gurdip Bakshi, Charles Cao, Zhiwu Chen

Research output: Contribution to journalArticle

78 Citations (Scopus)

Abstract

This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments - puts and the underlying asset prices may go down together.

Original languageEnglish (US)
Pages (from-to)549-584
Number of pages36
JournalReview of Financial Studies
Volume13
Issue number3
DOIs
StatePublished - Jan 1 2000

Fingerprint

Option prices
Decay
Price dynamics
Asset prices
Hedging
Market microstructure

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

@article{32a211b1c1574b6f8053863a81a36274,
title = "Do call prices and the underlying stock always move in the same direction?",
abstract = "This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments - puts and the underlying asset prices may go down together.",
author = "Gurdip Bakshi and Charles Cao and Zhiwu Chen",
year = "2000",
month = "1",
day = "1",
doi = "10.1093/rfs/13.3.549",
language = "English (US)",
volume = "13",
pages = "549--584",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "3",

}

Do call prices and the underlying stock always move in the same direction? / Bakshi, Gurdip; Cao, Charles; Chen, Zhiwu.

In: Review of Financial Studies, Vol. 13, No. 3, 01.01.2000, p. 549-584.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Do call prices and the underlying stock always move in the same direction?

AU - Bakshi, Gurdip

AU - Cao, Charles

AU - Chen, Zhiwu

PY - 2000/1/1

Y1 - 2000/1/1

N2 - This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments - puts and the underlying asset prices may go down together.

AB - This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments - puts and the underlying asset prices may go down together.

UR - http://www.scopus.com/inward/record.url?scp=0034412341&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0034412341&partnerID=8YFLogxK

U2 - 10.1093/rfs/13.3.549

DO - 10.1093/rfs/13.3.549

M3 - Article

AN - SCOPUS:0034412341

VL - 13

SP - 549

EP - 584

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

IS - 3

ER -