Implications of Comovement Patterns in the Stock Option and Spot Markets
نویسندگان
چکیده
We study comovements between standardized option values and spot stock prices for the S&P 100 equity index and ten large U.S. firms over 1988 to 1995. To standardize option values, we use a weighted average of option implied volatilities (IV) to control for the option’s moneyness, interest rates, and time to maturity. We find differences in the comovement behavior across individual stocks and the index that have implications for better understanding: (1) the dynamics between spot and options markets, (2) the nature of the bias in IV for subsequent realized volatility, (3) the extent to which stochastic volatility is a priced risk factor that affects the valuation of index and individual stock options, and (4) the asymmetric volatility phenomenon. Collectively, our findings suggest that only the market-wide component of stochastic volatility is materially important for understanding option prices and the asymmetric volatility phenomenon in daily returns. JEL: G12, G14, D80
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