tailieunhanh - DO CALL PRICES AND THE UNDERLYING STOCK ALWAYS MOVE IN THE SAME DIRECTION?

The decision to invest in stocks requires not only an assessment of the risk-return trade-off given the existing data, but also an act of faith (trust) that the data in our possession are reliable, that the overall system is fair. Episodes like the collapse of Enron may change not only the distribution of expected payoffs, but the fundamental trust in the system that delivers those payoffs. Most of us will not enter a three-card game played on the street, even after observing a lot of rounds (and thus getting an estimate of the “true” distribution of payoffs). The reason is that we do not trust the. | Do Call Prices and the Underlying Stock Always Move in the Same Direction Gurdip Bakshi University of Maryland Charles Cao Pennsylvania State University Zhiwu Chen Yale University This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S P 500 options we find that sampled intraday or interday call put prices often go down up even as the underlying price goes up and call and put prices often increase or decrease together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics options are not redundant securities nor ideal hedging instruments puts and the underlying asset prices may go down together. Much of the extant knowledge about option pricing is based on the assumption that the underlying asset price follows a one-dimensional diffusion process. Examples of such option pricing models include the classic Black-Scholes 1973 Merton 1973 the Cox-Ross 1976 constant elasticity of variance the ones studied in Derman and Kani 1994 Rubinstein 1994 Bergman Grundy and Wiener 1996 Bakshi Cao and Chen 1997 2000 and Dumas Fleming and Whaley 1998 . All models in the one-dimensional diffusion class share three basic properties. First call prices are monotonically increasing and put prices are monotonically decreasing in the underlying asset price the monotonicity property . Second as the underlying asset price is the sole source of uncertainty for all of its options option prices must be perfectly correlated with each other and with the underlying asset the perfect We would like to thank Kerry Back Cliff Ball David Bates Steve Buser Tarun Chordia Alex David Ian Domowitz Phil Dybvig Mark Fisher Eric Ghysels John Griffin Frank Hatheway Bill Kracaw Craig Lewis Dilip Madan Jim Miles Shashi Murthy Ron Masulis Louis Scott Lemma Senbet Hans Stoll Rene Stulz Guofu Zhou and .