PROBABILITY OF PRICE REVERSAL AND RELATIVE NOISE IN STOCK AND OPTION MARKETS

Michel Gendron, Nabil Khoury, Pierre Yourougou

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)147-159
Number of pages13
JournalJournal of Financial Research
Volume17
Issue number2
DOIs
StatePublished - 1994
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance

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