1 research outputs found
Temporal Price Relation between Stock and Option Markets and A Bias of Implied Volatility in Option Price
We show that if a particular temporal relation exists between the option and spot
markets, the implied volatility in option prices can be biased depending on the level of the true
volatility. The higher the true volatility, the more upward (downward) biased the implied
volatility will be, if the option market leads (lags) the spot market. Using intraday data of the
S&P 500 index options, we show that the option market leads the spot market at least in the
sample. More importantly, the implied volatility is biased due to the lead-lag relationship, and
the bias is more profound when the market is more volatile.published or submitted for publicationnot peer reviewe