Temporal Price Relation between Stock and Option Markets and a Bias of Implied Volatility in Option Prices

OFOP Paper No. 99-07

25 Pages Posted: 28 Aug 2000

See all articles by Phelim P. Boyle

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Seokgu Byoun

University of South Carolina - Darla Moore School of Business

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: September 1999

Abstract

We show that if a particular temporal relation exists between the option and spot markets, the implied volatility in option prices can be biased depending on the level of the true volatility. The higher the true volatility, the more upward (downward) biased the implied volatility will be, if the option market leads (lags) the spot market. Using intraday data of the S&P 500 index options, we show that the option market leads the spot market at least in the sample. More importantly, the implied volatility is biased due to the lead-lag relationship, and the bias is more profound when the market is more volatile.

JEL Classification: G13, M41

Suggested Citation

Boyle, Phelim P. and Byoun, Seokgu and Park, Hun Y., Temporal Price Relation between Stock and Option Markets and a Bias of Implied Volatility in Option Prices (September 1999). OFOP Paper No. 99-07, Available at SSRN: https://ssrn.com/abstract=202151 or http://dx.doi.org/10.2139/ssrn.202151

Phelim P. Boyle (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

Seokgu Byoun

University of South Carolina - Darla Moore School of Business

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Urbana, IL 61820
United States
217-333-0659 (Phone)
217-244-3102 (Fax)

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