Price Discovery during Parallel Stocks and Options Preopening: Information Distortion and Hints of Manipulation
41 Pages Posted: 15 May 2014 Last revised: 9 Feb 2018
Date Written: August 24, 2014
Many stock exchanges implement advanced procedures toward preventing manipulative orders from distorting informative price discovery during preopening sessions. Often, such sessions involve both the stock and options markets, with book-based indicative stock prices and traded index options, whose underlying is the indicative index. Significant differences between the options-implied and the indicative indexes may point at either differences in informational efficiencies, or that one of the markets is manipulated. Using a unique dataset, we explore informational (prices) and transactional (liquidity) efficiencies. We find significant price and illiquidity patterns similar to those predicted by theoretical models of manipulation, but also informational inefficiencies.
Keywords: Price discovery; Manipulation; Preopening; Liquidity
JEL Classification: D84, G12, G13, G14
Suggested Citation: Suggested Citation