While many studies find that option prices lead stock prices, J. A. Stephan and R. E. Whaley (1990) find that stocks lead options. The authors find no evidence that options, even deep out-of-the-money options, lead stocks. After confirming Stephan and Whaley's results, they show their results can be explained as spurious leads induced by infrequent trading of options. The authors show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, they find no evidence of arbitrage opportunities associated with the stock lead.

We investigate what stock return synchronicity reflects in terms of price informativeness by examining its effect on the pricing of seasoned equity offerings (SEOs). Based on 5,087 SEOs from 1984 to 2007, we find a significantly negative relation between stock return synchronicity (estimated as the logit transformation of the R-squared statistic from a two-factor regression) and SEO discounts (the percentage differences between pre-offer day closing prices and offer prices). The negative relation is strongest when there is no analyst coverage, and it declines as analyst coverage increases. This shows that stock price is more informative when stock return synchronicity is higher and also that information asymmetry can be mitigated by analyst coverage. We further decompose stock return synchronicity into the market comovement and industry comovement components and find that both components are equally important in affecting SEO discounts.

We investigate the relations between trading volumes and our proxies for information flows and divergences in opinions. We view S&P 500 Index futures' open interest as a useful proxy for divergences of traders' opinions, and find that volumes are higher on days when open interest increases than on days with declines. Volume in individual equities is more closely related to firm-specific information flows, while equity basket volume is more closely associated with market information. This differential impact is greatest for small capitalization stocks where market-wide news has no explanatory power.

Kalok Chan, Y. Peter Chung, Herb Johnson, The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options, The Journal of Financial and Quantitative Analysis, Vol. 30, No. 3 (Sep., 1995), pp. 329-346

This article analyzes the intraday interdependence of order flows and price movements for actively traded NYSE stocks and their Chicago Board Options Exchange (CBOE)-traded options. Stock net trade volume (buyer-initiated volume minus seller-initiated volume) has strong predictive ability for stock and option quote revisions, but option net trade volume has no incremental predictive ability. This suggests that informed investors initiate trades in the stock market but not in the option market. On the other hand, both stock and option quote revisions have predictive ability for each other. Thus, while information in the stock market is contained in both quote revisions and trades, information in the option market is contained only in quote revisions.

We examine the intraday relationship between returns and returns volatility in the stock index and stock index futures markets. Our results indicate a strong intermarket dependence in the volatility of the cash and futures returns. Price innovations that originate in either the stock or futures markets can predict the future volatility in the other market. We show that this relationship persists even during periods in which the dependence in the returns themselves appears to weaken. The findings are robust to controlling for potential market frictions such as asynchronous trading in the stock index. Our results have implications for understanding the pattern of information flows between the two markets.

ABSTRACT We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.

We examine the effect of information asymmetry on equity prices in the local A- and foreign B-share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross-sectional variation in B-share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid-ask spread in the A- and B-share markets explains 44% and 46% of the variation in B-share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables. © 2008 by The American Finance Association.