TY - JOUR
T1 - PROBABILITY OF PRICE REVERSAL AND RELATIVE NOISE IN STOCK AND OPTION MARKETS
AU - Gendron, Michel
AU - Khoury, Nabil
AU - Yourougou, Pierre
PY - 1994
Y1 - 1994
N2 - In this paper we take a new approach to the study of the interrelation between stock and option markets by extending 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 noisier 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.
AB - In this paper we take a new approach to the study of the interrelation between stock and option markets by extending 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 noisier 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.
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U2 - 10.1111/j.1475-6803.1994.tb00182.x
DO - 10.1111/j.1475-6803.1994.tb00182.x
M3 - Article
AN - SCOPUS:84986520816
SN - 0270-2592
VL - 17
SP - 147
EP - 159
JO - Journal of Financial Research
JF - Journal of Financial Research
IS - 2
ER -