Do options contribute to price discovery in emerging markets

We examine the informational role of derivatives in price discovery in Taiwan. After controlling for market cycles, moneyness, and liquidity, we use three different methods to measure the information contents in different trading venues. We find that the trades on futures contribute the most to price discovery. The futures transactions, however, are also the most costly in executing information trading. The information role of options varies with moneyness and market cycles. Options tend be more informative during a downtrend period. This can be partially explained by short-sale constraints. Out-of-the-money options have higher permanent price effects, greater price contributions, and larger information share than other options. It suggests that informed traders are more concerned about option’s leverage than its delta or vega. Thus, in examining price discovery in different trading venues, pooling options data irrespective to market cycles and moneyness may affect the empirical results.