We study the implied volatility behavior of call options around scheduled news announcement days. Implied volatilities increase significantly during the pre-event period and reach a maximum on the eve of the news announcement. After the news release, implied volatility drops sharply and gradually moves back to its long-run level. Only on the event date are movements in the price of the underlying significantly larger than expected. These results confirm the theoretical results of Merton (1973).

In rational, efficiently functioning and complete markets, returns on derivative and underlying securities should be perfectly contemporaneously correlated. Due to market imperfections, one of these markets may reflect information faster. The use of high-frequency data and the choice for a small unit time interval to measure these lead-lag relations comes at the cost of some or many missing observations, causing traditional estimators to either under- or overestimate covariances and correlations. We use a new estimator to estimate lead-lag relationships between the cash AEX index, options and futures. We find that futures returns lead both options and cash index returns by approximately 10 minutes. The relationship between options and the cash market is not completely unidirectional.