Price discovery in stock and option market

In this paper the issue of price discovery (i.e. the incorporation of new information in the security price) in the stock market on the one hand and the option market on the other hand is analysed. First, call-option values are converted to implied stock prices by using an inverted Black and Scholes (1973) model. Second, the stock-prices are com- pared to the option implied stock-prices. For this the modied measures of Chakravarty et al. (2004), based on the measures of Harris et al. (2002) and Hasbrouck (1995), are used. These methods are complemented with the measures from Putnins (2013), to avoid temporary noise eects. Finally, we investigate in time-series determinants of the level of price discovery and we analyse the explicability and predictability of the information shares, following Mizrach and Neely (2008). Our dataset consists of Apple stock and option bid-=askquotes from March till June 2012.