This paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the S&P 500 equity futures option market. The American futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in‐the‐money and to the option's time to expiration. The models are also shown to generate abnormal risk‐adjusted rates of return after transaction costs. The joint hypothesis that the American futures option pricing models are correctly specified and that the S&P 500 futures option market is efficient is refuted, at least for the sample period January 28, 1983 through December 30, 1983.

In rational, efficiently functioning markets, the returns on stock index and stock index futures contracts should be perfectly, contemporaneously correlated. This study investigates the time series properties of 5-minute, intraday returns of stock index and stock index futures contracts, and finds that S&P 500 and MM index futures returns tend to lead stock market returns by about five minutes, on average, but occasionally as long as 10 minutes or more, even after stock index returns have been purged of infrequent trading effects; however, the effect is not completely unidirectional, with lagged stock index returns having a mild positive predictive impact on futures returns.

The development of asset pricing models that rely on instrumental variables together with the increased availability of easily accessible economic time-series have renewed interest in predicting security returns. Evaluating the significance of these new research findings, however, is no easy task. Because these asset pricing theory tests are not independent, classical methods of assessing goodness-of-fit are inappropriate. This study investigates the distribution of the maximal R-square when k of m regressors are used to predict security returns. The authors provide a simple procedure that adjusts critical R-square values to account for selecting variables by searching among potential regressors.

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. The authors propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. The authors' analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced.

This study focuses on the ex-dividend stock price decline implicit within the valuation of American call options on dividend-paying stocks. The Roll (1977) American call option pricing formula and the observed structure of CBOE call option transaction prices are used to infer the expected ex-dividend stock price decline as a proportion of the amount of the dividend. The relative decline is shown to be not meaningfully different from one, confirming some recent evidence from studies which examined stock prices in the days surrounding ex-dividend.

Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.

[In this paper, we use call option prices to identify synergies and news from merger and acquisition (M&A) transaction announcements. We find that M&A announcements result in large and approximately equal gains to the bidder and the target on average, with the combined gains being large enough to justify the premium paid to target shareholders. On average, M&A announcements release good news about targets, but bad news about bidders. This suggests that market prices understate true synergy gains, and helps reconcile the generally negative market-based evidence on value-creation in takeovers with their continued prominence in everyday business strategy.]

The procedure for opening stocks on the NYSE appears to affect price volatility. An analytical framework for assessing the magnitude of the structurally induced volatility is presented. The ratio of variance of open-to-open returns to close-to-close returns is shown to be consistently greater than one for NYSE common stocks during the period 1982 through 1986. The greater volatility at the open is not attributable to the way in which public information is released since both the open-to-open return and the close-to-close return span the same period of time. Instead, the greater volatility appears to be attributable to private information revealed in trading and to temporary price deviations induced by specialist and other traders. The implied cost of immediacy at the open is significantly higher than at the close. Other empirical evidence in this article documents the volume of trading at the open, the time delays between the exchange opening and the first transaction in a stock, the difference in daytime volatility versus overnight volatility, and the extent to which volatility is related to trading volume.