Ever since the concept of market efficiency was defined, individuals have been trying to find ways to measure, test, and show different levels of efficiency in markets. Efficient markets show a reflection in value from information. This study concerns itself with the market for securities. Specifically, it is concerned with the question, ‘What effect does the options market have on the efficiency of the underlying security?’ Given the above question, this study takes the position that the options market has a narrowing effect on the transactions cost of a security, which stands as a measure of market efficiency. As such, it is noted that the existence of the option allows dealers to better value the underlying security, and thus the market is more efficient. This study derives an option pricing model, follows it with a theoretical section, and then outlines the expected negative relationship between the options market and the efficiency of a market, due to the options market being an additional piece of relevant information regarding the security’s future performance. It then offers an empirical test of this hypothesis, the results of which do not support this hypothesis.
Licking, Andrew, "Is Efficiency Optional" (2012). Senior Independent Study Theses. Paper 5560.
Bachelor of Arts
Senior Independent Study Thesis
© Copyright 2012 Andrew Licking