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.


Hartman, James

Second Advisor

Sell, John


Economics; Mathematics

Publication Date


Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

Licking_Andrew DataSet.xlsx (454 kB)
Excel File of Data set



© Copyright 2012 Andrew Licking