We show that if a lead-lag 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; that is, the higher the true volatility, the more upward biased the implied volatility will be. We then test the theoretical conjecture, using intraday transactions data of the S&P 500 stock index and its options. The empirical results show that the S&P 500 index option market leads the cash index, and that the bias of the implied volatility due to the lead-lag relation is statistically significant, confirming our theoretical conjecture.
Boyle, P., Byoun, S. and Park, H. (2002), "The lead-lag relation between spot and option markets and implied volatility in option prices", Research in Finance (Research in Finance, Vol. 19), Emerald Group Publishing Limited, Bingley, pp. 269-284. https://doi.org/10.1016/S0196-3821(02)19012-5Download as .RIS
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